Initial Public Offering (IPO): Registration Statement (General Form) — Form S-1 Filing Table of Contents
Document/ExhibitDescriptionPagesSize 1: S-1 Registration Statement (General Form) HTML 930K
2: EX-3.1 Articles of Incorporation/Organization or By-Laws HTML 18K
3: EX-3.2 Articles of Incorporation/Organization or By-Laws HTML 43K
4: EX-3.3 Articles of Incorporation/Organization or By-Laws HTML 105K
5: EX-3.4 Articles of Incorporation/Organization or By-Laws HTML 139K
6: EX-5.1 Opinion re: Legality HTML 11K
7: EX-10.1 Material Contract HTML 61K
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26: EX-21.1 Subsidiaries of the Registrant HTML 11K
27: EX-23.1 Consent of Experts or Counsel HTML 9K
Approximate date of commencement of proposed sale to the
public: As soon as practicable after this Registration
Statement becomes effective.
If any of the securities being registered on this Form are to be
offered on a delayed or continuous basis pursuant to
Rule 415 under the Securities Act, check the following
box: o
If this Form is filed to register additional securities for an
offering pursuant to Rule 462(b) under the Securities Act,
please check the following box and list the Securities Act
registration statement number of the earlier effective
registration statement for the same
offering. o
If this Form is a post-effective amendment filed pursuant to
Rule 462(c) under the Securities Act, check the following
box and list the Securities Act registration statement number of
the earlier effective registration statement for the same
offering. o
If this Form is a post-effective amendment filed pursuant to
Rule 462(d) under the Securities Act, check the following
box and list the Securities Act registration statement number of
the earlier effective registration statement for the same
offering. o
CALCULATION OF REGISTRATION FEE
Proposed Maximum
Amount of
Title of Each Class of
Aggregate
Registration
Securities to Be Registered
Offering Price (1)(2)
Fee
Class A Common Stock, $0.001 par value per share
$ 200,000,000
$ 21,400
(1)
Estimated solely for the purpose of computing the amount of
registration fee pursuant to Rule 457(o) under the
Securities Act of 1933, as amended.
(2)
Includes shares the underwriters have the option to purchase to
cover over-allotments, if any.
The registrant hereby amends this registration statement on
such date or dates as may be necessary to delay its effective
date until the registrant shall file a further amendment which
specifically states that this registration statement shall
thereafter become effective in accordance with section 8(a)
of the Securities Act of 1933 or until the registration
statement shall become effective on such date as the Commission,
acting pursuant to said section 8(a), may determine.
The
information in this prospectus is not complete and may be
changed. Neither we nor the selling stockholders may sell these
securities until the registration statement filed with the
Securities and Exchange Commission is effective. This prospectus
is not an offer to sell these securities and it is not
soliciting offers to buy these securities in any jurisdiction
where the offer or sale is not
permitted.
This is the initial public offering of The Go Daddy Group, Inc.
Class A common stock. We are
selling shares
of our Class A common stock, and the selling stockholders,
both of whom are members of our senior management, are
selling shares
of our Class A common stock. We will not receive any
proceeds from the sale of shares by the selling stockholders. No
public market currently exists for our shares. We anticipate
that the initial public offering price will be between
$ and
$ per
share.
We have applied to have our Class A common stock approved
for quotation on the Nasdaq National Market under the symbol
“DADY.”
We have two classes of authorized common stock, Class A
common stock and Class B common stock. The rights of the
holders of Class A common stock and Class B common
stock are identical, except with respect to voting and
conversion. Each share of Class A common stock is entitled
to one vote per share. Each share of Class B common stock
is entitled to two votes per share and is convertible at any
time at the option of the holder into one share of Class A
common stock. All Class B common stock is currently
beneficially owned by Bob Parsons, our founder, chairman and
chief executive officer.
Investing in our Class A common stock involves risks.
See “Risk Factors” beginning on page 8 of this
prospectus.
Per Share
Total
Public offering price
$
$
Underwriting discounts and commissions
$
$
Proceeds, before expenses, to Go Daddy
$
$
Proceeds, before expenses, to the selling stockholders
$
$
Bob Parsons has also granted the underwriters the right to
purchase up to an
additional shares
of Class A common stock to cover over-allotments.
Neither the Securities and Exchange Commission nor any state
securities regulator has approved or disapproved these
securities or determined if this prospectus is truthful or
complete. Any representation to the contrary is a criminal
offense.
We expect delivery of the shares to the underwriters on or
about ,
2006.
You should rely only on the information contained in this
prospectus. Neither we nor the selling stockholders or any of
the underwriters have authorized anyone to provide you with
information different from that contained in this prospectus. We
and the selling stockholders are offering to sell, and seeking
offers to buy, shares of our Class A common stock only in
jurisdictions where offers and sales are permitted. The
information in this prospectus is accurate only as of the date
of this prospectus, regardless of the time of delivery of this
prospectus or any sale of shares of our Class A common
stock.
For investors outside the United States: Neither we nor the
selling stockholders or any of the underwriters have done
anything that would permit this offering or possession or
distribution of this prospectus in any jurisdiction where action
for that purpose is required, other than in the United States.
Persons outside the United States who come into possession of
this prospectus must inform themselves about, and observe any
restrictions relating to, the offering of the shares of
Class A common stock and the distribution of this
prospectus outside of the United States.
Until and
including ,
2006 (25 days after the commencement of this offering), all
dealers that buy, sell or trade shares of our Class A
common stock, whether or not participating in this offering, may
be required to deliver a prospectus. This delivery requirement
is in addition to the obligation of dealers to deliver a
prospectus when acting as underwriters and with respect to their
unsold allotments or subscriptions.
This summary highlights information contained elsewhere in
this prospectus and does not contain all of the information you
should consider before buying shares of our Class A common
stock. Before deciding to invest in shares of our Class A
common stock, you should read the entire prospectus carefully,
including our consolidated financial statements and related
notes and the information set forth under the headings
“Risk Factors” and “Management’s Discussion
and Analysis of Financial Condition and Results of
Operations,” in each case included elsewhere in this
prospectus.
The Go Daddy Group, Inc.
Go Daddy is a leading provider of services that enable
individuals and businesses to establish, maintain and evolve an
online presence. We provide a variety of domain name
registration and website hosting services as well as a broad
array of on-demand and other services. We are the world’s
largest domain name registrar, with approximately
13.6 million domain names under management as of
April 30, 2006, and North America’s largest shared
website hosting provider. During the final six months of 2005,
we registered approximately
one-third of all domain
names registered in the top five generic top-level domains, or
gTLDs — .com, .net, .org, .biz and .info. Our domain name
registration services act as a gateway product for our other
services which include website hosting and creation tools,
ecommerce and security solutions and productivity and marketing
tools. Our services can be purchased independently or as bundled
suites of offerings targeted to meet the specific needs of our
customers, and we market these services both at the initial
point of purchase as well as throughout the customer lifecycle.
We have developed substantially all of our service offerings
internally and believe our suite of services is
best-of-breed in the
industry in terms of comprehensiveness, performance,
functionality and ease of use. We seek to strengthen customer
relationships by providing what we believe are the highest
levels of customer care and support in the industry.
We generate revenue from sales made directly to customers
through our primary website, www.GoDaddy.com, and through
our customer care center, as well as indirectly through our
large network of resellers. As of December 31, 2005, we had
approximately 2.4 million customers under contract. Our
business model is characterized by non-refundable, up-front
payments, which lead to recurring revenue and positive operating
cash flow. Our company was founded in January 1997 and has
experienced rapid growth in recent periods. In 2005, we
generated $139.8 million of revenue, an increase of 92%
over 2004, and in 2004 we generated $73.0 million of
revenue, an increase of 86% over 2003.
Market Opportunity
We believe there is significant growth potential in our current
and future markets as a result of the continued growth in
Internet users and usage, the increasing benefits to individuals
and businesses from establishing an online presence, and the
relatively small percentage of Internet users who have
registered a domain name. The number of Internet users worldwide
was estimated to be 1.2 billion in 2005, and is estimated
to grow to approximately 2.2 billion in 2010, while only
approximately 94 million domain names were registered
worldwide as of December 31, 2005. Additionally, while most
large corporations are already operating online, many small
businesses have yet to establish a presence online, and even
fewer transact with their customers online.
The dynamic nature of the Internet, including the proliferation
of content, ecommerce and applications online as well as the
continued advancement of its related technologies, create a
number of challenges for individuals and businesses seeking to
establish, maintain and evolve an online presence, or an
electronic “address” on the Internet. Many lack the
technical knowledge and skills necessary to complete this
process, and attempting to do so is frequently time-consuming
and expensive, often requiring consultation with numerous online
and offline resources and procurement of software and services
from a variety of vendors.
We are a leading provider of services that enable individuals
and businesses to establish, maintain and evolve an online
presence quickly and easily. Key elements of our solution
include:
•
“One-stop shop” for establishing and maintaining an
online presence. We provide customers a single location
where they can register domain names, purchase the services and
functionality necessary to establish, maintain and update an
online presence, and access comprehensive technical support.
•
Value-oriented services, features and functionality focused
on customer needs. Our corporate philosophy is to offer our
customers competitively priced, value-oriented services that
directly address their evolving needs. We actively monitor
trends in customer usage and market demand in order to develop
services that anticipate and respond to these customer needs. We
believe our
customer-focused
approach enhances our customers’ satisfaction with us and
engenders a high degree of loyalty within our customer base.
•
Focus on customer care and advice. Our professionally
trained customer care representatives provide technical
assistance and also operate as “business consultants,”
advising customers of additional services that best suit their
individual needs. In addition, our
easy-to-use website
contains extensive educational content designed to demystify the
process of establishing an online presence and to assist
customers in choosing the services that best meet their needs.
•
High level of system reliability and security. Our
technology infrastructure incorporates hardware, software and
services from leading suppliers and is designed to handle large
and expanding volumes of domain name registrations, website
hosting accounts and traffic on our own and our customers’
websites in an efficient, scalable and fault-tolerant manner.
Our Competitive Strengths
Our competitive strengths include the following:
•
Market leadership position. Our leading market positions
in total domain names under registration, new domain name
registrations, and website hosting provide us with a number of
competitive advantages. We benefit from increased revenue
opportunities through sales of additional services to our
existing customer base, and from reduced customer acquisition
costs as a result of the large number of referrals we receive
from our customers. In addition, we benefit from economies of
scale and are able to allocate research and development,
advertising and various other costs across a large customer base.
•
Active customer relationship management and lifecycle
marketing. We actively market additional services both at
the time of a customer’s initial purchase and throughout
the customer lifecycle through our email, telephone, direct mail
and other targeted marketing campaigns. Our high level of
customer service affords us many opportunities to sell customers
additional higher-margin services and enhances our customer
retention rates.
•
Strong brand recognition. As a result of our strong brand
recognition, we attract a large number of potential customers
directly to our website, thus reducing our customer acquisition
costs and enhancing revenue growth. Additionally, our broad base
of registered domain name customers serves as an effective
marketing channel for our services, providing us with follow-on
sales opportunities and new sales through
word-of-mouth referrals.
•
Leading proprietary technology. We have invested
significant resources in the internal development of services we
offer to our customers. In-house development of our technology
enables flexibility in marketing and pricing and reduces our
licensing costs, thereby improving our margins. Our internal
development also enables us to offer a set of services that are
fully integrated and easy to use and support.
We believe there is significant growth potential in our current
and future markets, and we intend to achieve further growth by
pursuing the following key strategies:
•
continue to grow our customer base;
•
sell additional services to customers;
•
continue to expand and enhance our service offerings;
•
strengthen our customer relationships; and
•
pursue acquisitions and expand our international presence.
Risk Factors
We are subject to a number of risks and uncertainties that could
materially harm our business or inhibit our strategic plans.
Before investing in our Class A common stock, you should
carefully consider the following:
•
we have a history of losses and may not be able to operate
profitably or sustain positive cash flow in future periods;
•
we must further develop our brand recognition and market our
services in a cost-effective manner in order to successfully
grow our business;
•
we face competition in our markets and we expect this
competition to intensify;
•
our strategy of offering our customers an array of on-demand and
other services beyond our core domain name registration and
website hosting services is still relatively unproven;
•
changes in the regulation and oversight of the domain name
registration system, including increases in the prices that
registrars must pay to registries for domain names, could
significantly affect our business model; and
•
the other factors described in the section entitled “Risk
Factors” starting on page 8, and other information
provided throughout this prospectus.
Reincorporation and Dual-Class Structure
In connection with this offering, we are reincorporating in
Delaware and are converting from a subchapter S corporation
into a subchapter C corporation. Relating to this
reincorporation, we are adopting a dual-class common stock
structure through the authorization of a new class of common
stock. Each share of Class B common stock will have two
votes per share, will be convertible into one share of
Class A common stock at any time, and will otherwise be
identical to our Class A common stock. Bob Parsons, our
founder, chairman and chief executive officer, beneficially owns
100% of our outstanding common stock prior to this offering and
will hold all shares of Class B common stock,
representing % of the combined
voting power of our Class A and Class B common stock,
immediately following the completion of this offering. Only our
Class A common stock will be listed for trading on the
Nasdaq National Market following this offering. For a further
description of our dual-class structure, see “Description
of Capital Stock.”
Our principal executive offices are located at
14455 N. Hayden Road, Scottsdale, Arizona85260 and
our telephone number is (480) 505-8800. Our primary website
address is www.GoDaddy.com. The information on, or that
can be accessed through, this or our other websites is not part
of this prospectus.
Except where the context requires otherwise, “Go
Daddy,”“we,”“us” and “our”
refer to The Go Daddy Group, Inc., and its wholly-owned
subsidiaries. Go Daddy, our logo, Website Tonight, Quick
Shopping Cart, Traffic Blazer, TheDomainNameAfterMarket and Wild
West Domains are registered trademarks of Go Daddy. This
prospectus also includes other trademarks of ours and other
persons.
Class A
common stock offered by the selling stockholders
shares
Total
shares
Shares of common stock to be outstanding after this offering:
Class A
common stock to be outstanding after this offering
shares
Class B
common stock to be outstanding after this offering
shares
Total
shares
Use of proceeds
We plan to use the net proceeds received by us from this
offering for the repayment of approximately $7.0 million in
indebtedness, and for working capital and other general
corporate purposes, including expansion of our customer care and
support and research and development organizations, further
development and expansion of our service offerings, capital
expenditures, including those relating to further build-out of
our data center, and possible acquisitions of complementary
businesses, technologies or other assets. Two members of our
senior management are selling shares in this offering. We will
not receive any of the proceeds from the sale of these shares.
See “Use of Proceeds.”
Proposed Nasdaq National Market symbol
“DADY”
The number of shares of common stock that will be outstanding
after this offering is based on the 36,601,656 shares
outstanding at December 31, 2005, and excludes shares of
Class A common stock reserved for issuance under our option
plans, of which 6,342,900 shares were subject to
outstanding options at a weighted average exercise price of
$1.93 per share at December 31, 2005.
Unless otherwise indicated, all information in this prospectus
assumes:
•
our reincorporation, and in connection therewith, the exchange
by Bob Parsons of all outstanding shares of our common stock for
shares of Class B common stock, and the exchange of all
outstanding options to purchase common stock for options to
purchase shares of Class A common stock;
•
the exercise by Barbara J. Rechterman, our Executive Vice
President and Chief Marketing Officer, of options to
purchase shares
of Class A common stock upon the commencement of trading of
our shares in connection with this offering, all of which shares
will be sold in this offering; and
•
no exercise by the underwriters of their option to purchase up
to shares
of Class A common stock from Bob Parsons, to cover
over-allotments.
SUMMARY CONSOLIDATED FINANCIAL DATA AND OPERATING DATA
We present below summary consolidated financial data and
operating data. The consolidated statement of operations and
statement of cash flows data for the years ended
December 31, 2003, 2004 and 2005 and the consolidated
balance sheet data as of December 31, 2004 and 2005 have
been derived from our audited consolidated financial statements
included elsewhere in this prospectus. The consolidated
statement of operations data for the year ended
December 31, 2002 and consolidated balance sheet data as of
December 31, 2003 have been derived from our audited
consolidated financial statements that are not included in this
prospectus. You should read this information together with
“Management’s Discussion and Analysis of Financial
Condition and Results of Operations” and our consolidated
financial statements and related notes, each included elsewhere
in this prospectus. Our historical results are not necessarily
indicative of the results to be expected in any future period.
We are a subchapter S corporation and therefore we have not
reflected deferred taxes in our consolidated financial
statements. We are not required to pay corporate federal and
state income taxes until the revocation of our subchapter S
corporation status. The statement of operations data do not
include a pro forma adjustment for income taxes, calculated in
accordance with SFAS No. 109, Accounting for Income
Taxes, that would have been recorded if we were a
subchapter C corporation, because we would have provided a
full valuation allowance on our net deferred tax assets and as
such no income tax provision would be recorded.
The pro forma balance sheet data give effect to aggregate
distributions of $3.8 million to be paid in 2006 to our
sole stockholder and the exercise of stock options by a selling
stockholder in order to sell shares in this offering. The pro
forma as adjusted balance sheet data also give effect to our
receipt of the net proceeds from the sale
of shares
of Class A common stock offered by us at an assumed initial
public offering price of
$ per
share, after deducting the estimated underwriting discounts and
commissions and estimated offering expenses payable by us, and
the use of proceeds from this offering to repay approximately
$7.0 million of outstanding debt.
This offering and an investment in our Class A common
stock involve a high degree of risk. You should carefully
consider the risks and uncertainties described below, together
with all of the other information in this prospectus, including
the consolidated financial statements and related notes included
elsewhere in this prospectus, before deciding to invest in our
Class A common stock. If any of the following risks
actually occurs, our business, financial condition, results of
operations and future prospects could be materially and
adversely affected. In that event, the market price of our
Class A common stock could decline and you could lose part
or even all of your investment.
Risks Related to our Business
We have a history of losses and may not be able to operate
profitably or sustain positive cash flow in future
periods.
We have had a net loss in every year since inception. In 2005,
we had a net loss of approximately $11.6 million, and we
have budgeted for increases in all operating expense categories
in 2006 including significantly increased costs related to
becoming a public reporting company. As a result, becoming
profitable will depend in large part on our ability to generate
and sustain substantially increased revenue levels in future
periods. We are paid up-front for substantially all of our
services, which enables us to generate positive cash flow.
However, we typically recognize revenue and cost of revenue from
each customer contract over the term of the relevant service
offering, while we recognize most of our other operating
expenses in the period in which they were incurred. Thus, we
have to generate significant sales activity in order to achieve
profitability on a basis consistent with U.S. generally accepted
accounting principles, or GAAP. Accordingly, we may not be able
to operate profitably, or sustain positive cash flow, in the
future on a quarterly or annual basis.
Our quarterly and annual operating results may fluctuate
or deteriorate, which could adversely affect the trading price
of our Class A common stock.
Our quarterly and annual operating results may fluctuate, or be
adversely affected, as a result of a variety of factors, many of
which are outside of our control. These include:
•
concentrated expenditures for advertising, such as our Super
Bowl advertisements in the first quarter of each of 2005 and
2006;
•
concentrated capital expenditures in any particular period to
support our growth or for other reasons;
•
increased research and development expenses relating to the
development of new services resulting from our decision to move
into new markets;
•
lower than anticipated levels of traffic to our primary website
or reduced rates at which we convert this traffic into customers;
•
reductions in the number of domain names under registration or
in the rate at which this number grows, due to slow growth or
contraction in our markets, lower renewal rates, or other
factors;
•
the mix of services sold in a particular period between our core
domain name registration services and our other higher-margin
services;
•
reductions in the percentage of our domain name customers who
purchase additional services from us;
•
changes in our pricing policies or those of our competitors,
changes in domain name registration fees charged to us by
Internet registries or the Internet Corporation for Assigned
Names and Numbers, or ICANN, or other competitive pressures on
our prices;
•
the timing and success of new services and technology
enhancements introduced by our competitors, including free or
low-priced promotional offers, which could impact both new
customer growth and renewal rates;
technical difficulties or other factors that result in system
downtime;
•
federal, state or foreign regulation affecting our
business; and
•
weakness or uncertainty in general economic or industry
conditions.
It is possible that in one or more future quarters, due to any
of the factors listed above, a combination of those factors or
other reasons, our operating results may be below our
expectations and the expectations of public market analysts and
investors. In that event, the price of our shares of
Class A common stock could decline substantially.
In addition, in the past two years, we have experienced a
substantial increase in the number of new customers who register
domain names with us in our first fiscal quarter due to several
factors, including the effects of our Super Bowl advertising and
post-holiday consumer spending patterns. A significant spike in
our operating expenses has occurred during the first quarter of
each of 2005 and 2006 due to our Super Bowl advertising. These
patterns could have an adverse impact on the trading price of
our Class A common stock to the extent that they do not
occur as expected, thus making it more difficult to predict our
financial results in future periods.
We may not be able to grow our business unless we further
develop our brand recognition and market our services in a
cost-effective manner.
A growing number of companies offer services that compete with
ours. We believe that developing and maintaining our distinctive
brand image are critical to attracting additional customers.
Accordingly, we intend to continue pursuing an aggressive brand
enhancement strategy consisting primarily of online and offline
marketing initiatives. Some of our initiatives, such as our
television advertisements, are expensive. If these sales and
marketing expenditures do not result in increased revenue
sufficient to offset these expenses, our business and operating
results would be harmed. In addition, some of our
advertisements, radio shows and marketing efforts have tended to
be controversial, and our brand may be harmed if these
advertisements are not well received in the marketplace.
We use a variety of marketing channels to promote the Go Daddy
brand, including online paid search, television, radio and print
advertising. If one or more of these channels, such as online
keyword search, become unavailable to us because the costs of
advertising become prohibitively expensive or for other reasons,
we may become unable to promote our brand effectively, which
could harm our ability to grow our business.
If visitors to our website do not perceive our existing services
to be valuable to them, or if we alter or modify our brand
image, introduce new services, enter into new business ventures
that are not favorably received, or fail to maintain customer
service levels, customer perception of our brand could be
harmed. If the value of our brand is diminished as a result of
any or all of these factors, our business would likely suffer.
We face severe competition in the domain name registration
and web-based services markets, which we expect will continue to
intensify, and we may not be able to maintain or improve our
competitive position or market share.
We face significant competition from existing registrars and
from new registrars that continue to enter the market. As of
May 1, 2006, ICANN had 667 registrars accredited to
register domain names in one or more of the generic top-level
domains, or gTLDs. There are relatively few barriers to entry in
this market, so as this market continues to develop we expect
the number of competitors to increase. The continued entry into
the domain name registration market of competitive registrars
and unaccredited entities that act as resellers for registrars,
and the rapid growth of some competitive registrars and
resellers that have already entered the market, may make it
difficult for us to maintain our current market share.
The market for web-based services is intensely competitive and
rapidly evolving. We expect competition to increase from
existing competitors as well as from new market entrants. Most
of our existing competitors
are expanding the variety of services that they offer. These
competitors include, among others, domain name registrars,
website design firms, website hosting companies, Internet
service providers, Internet portals and search engine companies,
including Google, Microsoft, Network Solutions, VeriSign and
Yahoo! For a list of these competitors, see
“Business — Competition.” Many of these
competitors have greater resources, more brand recognition and
consumer awareness, greater international scope and larger bases
of customers than we do. As a result, we may not be able to
compete successfully against them in future periods. This
intense competition could also force us to enter into strategic
partnering relationships with third parties and, to the extent
we become reliant on these partners and these relationships are
subsequently terminated, our revenue levels and operating
results could be adversely affected.
In particular, Microsoft, Google and Yahoo! have recently
announced offerings or promotions that indicate that we may face
greater competition from these companies in the future.
Microsoft has recently announced Office Live, a product targeted
at businesses with fewer than ten employees that, once generally
available, will allow them to register a domain name and
establish a website that Microsoft would host. Microsoft has
also announced that it will offer a free basic version of Office
Live, which will be advertising supported, and that, for a paid
monthly subscription, it will offer an enhanced version, which
will include additional features and services that are similar
to many of our current service offerings. Microsoft has
indicated that its Office Live product will be integrated with
Microsoft Office and other Microsoft desktop applications run by
many small businesses that have functionality not offered by any
of our services. In addition, Google has recently announced its
Google Page Creator product, which includes a website design
tool together with free website hosting, as well as an online
group calendaring product. Similarly, Yahoo!, through its Yahoo!
Small Business portal, offers a number of web-based services,
including website hosting, email, ecommerce and security
services, that compete directly with many of our service
offerings. Microsoft, Google and Yahoo!, as well as other large
Internet companies, have the ability to offer these services for
free or at a reduced price as part of a bundle with other
service offerings. If these companies decide to devote greater
resources to the development, promotion and sale of these new
products and services, greater numbers of individuals and
businesses may choose to use these competitors as their starting
point for creating an online presence and as a general platform
for running their online business operations. In addition, these
and other large competitors, in an attempt to gain market share,
may offer aggressive price discounts on the services they offer.
These pricing pressures may require us to match these discounts
in order to remain competitive, which would reduce our margins,
or to lose customers altogether who decide to purchase the
discounted service offerings of our competitors. As a result of
these factors, in the future it may become increasingly
difficult for us to compete successfully.
We may be required to reduce our selling prices in the
future or may otherwise generate lower margins in our core
businesses as a result of competitive pressures.
Given the volatile nature of our industry, it is difficult to
predict whether we will be able to maintain our average selling
prices. We may be required, due to competitive pressures or
otherwise, to reduce the prices we charge for our core domain
name registration, website hosting and other services. If we
reduce our prices, our margins would decline, which would
adversely affect our operating results. This could be
particularly severe in our largest business, domain name
registrations, where margins are already low and increases in
fees we must pay to registries or ICANN are likely to occur in
future periods. In addition, we have a significant number of
resellers of our services, and we generate lower margins through
these transactions. To the extent that our reseller base
continues to grow and these sales increase as a percentage of
total revenue, our margin levels would decline.
Our margins and revenue could also suffer if competitive
pressures force us to alter our current arrangement with respect
to advertising revenue we generate from “parked
pages” — domain names we register that do not
contain an active website. We currently do not share with the
registered owners of the domain names on which these
advertisements are served the revenue we receive from
advertising on these parked pages. We expect revenue generated
from advertising on parked pages to represent an increasing
portion of total revenue in future periods. If over time we are
forced to share this revenue from parked pages
with the registered owners of the domain names, our margins on
this revenue would suffer, which could harm our operating
results.
If we are not successful in preserving our corporate
culture and current levels of productivity as we grow, our
business could be harmed.
We believe that a key element of our corporate performance has
been our corporate culture, which we believe fosters innovation,
creativity and teamwork. As our organization grows and we are
required to implement more complex organizational management
structures, we may find it increasingly difficult to maintain
the beneficial aspects of our corporate culture. If our growth
adversely impacts our corporate culture, our business could be
harmed.
We have expanded our operations and our employee headcount
significantly in recent periods and anticipate that further
expansion will be required to realize our growth strategy. Our
operations growth has placed significant demands on our
management and other resources, which demands are likely to
continue. To manage our future growth, we will need to attract,
hire, retain and incentivize highly skilled and motivated
officers, managers and employees. We will also need to improve
existing systems and/or implement new infrastructure and systems
relating to our operations and financial controls. In addition,
we intend to continue to expand our operations by offering new
and complementary services and by expanding our market presence
through relationships with third parties. We may not be able to
accomplish this expansion in a cost-effective or timely manner,
or these efforts may not increase the overall market acceptance
of our services. Expansion of our operations in this manner
could also require significant additional expenditures and
strain our management, financial and operational resources. If
we are unable to successfully manage the growth we expect in our
operations, we may be unable to execute our business model.
This, in turn, could make us vulnerable to increased competitive
pressures and harm our business.
If our customers do not renew their domain name
registrations, or if they transfer their existing registrations
to our competitors, and we fail to replace their business, our
business would be adversely affected.
Our success depends in large part on our customers’
renewals of their domain name registrations. Domain name
registrations represented approximately 60% of total revenue in
2005, and our renewal rate in 2005 for domain name registrations
was approximately 62%. If we are unable to maintain or increase
our overall renewal rates for domain name registrations or if
any decrease in our renewal rates is not more than offset by
increases in new customer growth rates, our customer base and
our revenue would likely decrease. This would also reduce the
number of domain name customers to whom we could market our
other higher-margin services, thereby further potentially
impacting our revenue and profitability, driving up our customer
acquisition costs and harming our operating results. Since our
strategy is to expand the number of services we provide to our
customers, any decline in renewals of domain name registrations
not offset by new domain name registrations would likely have an
adverse effect on our business and results of operations.
If our customers do not find our on-demand service
offerings appealing, or if we fail to establish ourselves as a
reliable source for these services, our revenue may fall below
current levels and our margins would be adversely
impacted.
Our primary businesses, domain name registration and website
hosting, together accounted for approximately 86% of total
revenue during 2004 and 82% of total revenue during 2005. As
competition in the domain name registration and website hosting
markets continues to intensify, a key aspect of our strategy is
to diversify our revenue base by offering our customers an array
of other value-added, higher-margin services. This strategy is
still relatively unproven, as these services only accounted for
approximately 14% and 18% of total revenue during 2004 and 2005.
If we introduce services that do not function properly due to
flaws in design, operation or interoperability, that fail to
meet the needs of our customers, or that our customers simply do
not purchase, we will likely be unable to realize a return on
our investment in the development of these failed service
offerings, which could harm our operating results. In addition,
if, over time, our customers elect not to purchase our other
services altogether because they do not perceive them as
valuable or
because we have not sufficiently differentiated them from those
offered by our competitors, our revenue may decline below
current levels. In such an event, our margins would suffer
significantly because our additional service offerings, such as
email, our website design tool and Secure Sockets Layer, or SSL,
certificates, generally have higher margins than our core
businesses of domain name registrations and website hosting.
Thus, if we experience difficulty selling value-added services
in future periods, our ability to achieve and sustain
profitability would be harmed.
Our international expansion exposes us to business risks
that could limit the effectiveness of our growth strategy and
cause our results of operations to suffer.
Expansion into international markets is an important element of
our growth strategy. Introducing and marketing our services
internationally, developing direct and indirect international
sales and support channels and managing foreign personnel and
operations will require significant management attention and
financial resources. We face a number of risks associated with
expanding our business internationally that could negatively
impact our results of operations, including:
•
management, communication and integration problems resulting
from cultural differences and geographic dispersion;
•
compliance with foreign laws, including laws regarding liability
of online service providers for activities of customers and more
stringent laws in foreign jurisdictions relating to the privacy
and protection of third-party data;
•
accreditation and other regulatory requirements to provide
domain name registration, website hosting and other services in
foreign jurisdictions;
•
competition from companies with international operations,
including large international competitors and entrenched local
companies;
•
to the extent we choose to make acquisitions to enable our
international expansion efforts, the identification of suitable
acquisition targets in the markets into which we want to expand;
•
difficulties in protecting intellectual property rights in
international jurisdictions;
•
political and economic instability in some international markets;
•
sufficiency of qualified labor pools in various international
markets;
•
currency fluctuations and exchange rates;
•
potentially adverse tax consequences or inability to realize tax
benefits; and
•
the lower level of adoption of the Internet in many
international markets.
We may not succeed in our efforts to expand our international
presence as a result of the factors described above or other
factors which may have an adverse impact on our overall
financial condition and results of operations.
Because we are required to recognize revenue for our
services over the term of the applicable agreement, changes in
our sales may not be immediately reflected in our operating
results.
We recognize revenue from our customers ratably over the
respective terms of their agreements with us as required by
GAAP. Typically, our domain name registration agreements have
terms that range from one to ten years, and our website hosting
agreements have
month-to-month or
annual terms. Accordingly, increases in sales during a
particular period do not translate into immediate, proportional
increases in our revenue during that period, and a substantial
portion of the revenue that we recognize during a quarter is
derived from deferred revenue from customer agreements that we
entered into during previous quarters. As a result, we may not
generate net earnings despite substantial sales activity during
a particular period, since we are not allowed under GAAP to
recognize all of the revenue from these sales immediately, and
because we are required to reflect a significant portion of our
related operating expenses in full during such period.
Conversely the existence of substantial deferred revenue may
prevent deteriorating sales activity from becoming immediately
observable in our consolidated statement of operations.
In addition, we may not be able to adjust spending in a timely
manner to compensate for any unexpected revenue shortfall, and
any significant shortfall in revenue relative to planned
expenditures could negatively impact our business and results of
operations.
System failures or capacity constraints could reduce or
limit traffic on our websites and harm our business.
We have experienced system failures or outages in the past, and
will likely experience future system failures or outages that
disrupt the operation of our websites and harm our business. Our
revenue depends in large part on the volume of traffic to our
websites and on the number of customers whose websites we host
on our servers. Accordingly, the performance, reliability and
availability of our websites, servers for our corporate
operations and infrastructure are critical to our reputation and
our ability to generate a high volume of traffic to our websites
and to attract and retain customers.
We are continually expanding and enhancing our website features,
technology and network infrastructure, and other technologies to
accommodate substantial increases in the volume of traffic on
our websites, the number of customer websites we host and the
overall size of our customer base. We may be unsuccessful in
these efforts or we may be unable to project accurately the rate
or timing of these increases. We cannot predict whether
additional network capacity will be available from third-party
suppliers as we require it. In addition, our network or our
suppliers’ networks might be unable to achieve in a timely
manner or maintain data transmission capacity sufficiently high
to process orders or download data effectively in a timely
manner, especially if the volume of our customer orders
increases. Our failure, or our suppliers’ failure, to
achieve or maintain high capacity data transmission could
significantly reduce consumer demand for our services.
Our computer hardware operations and backup systems are located
in our facilities in the Phoenix, Arizona area. If these
locations experienced a significant system failure or
interruption, our business would be harmed. In particular, in
2006 we plan to open a new facility in Phoenix, Arizona to house
some of our customer website hosting servers and servers for our
corporate operations. If we experience system failures
associated with opening this new facility, or thereafter, our
website hosting operations could suffer, which, in turn, could
harm our business.
Our systems are also vulnerable to damage from fire, power loss,
telecommunications failures, computer viruses, physical and
electronic break-ins and similar events. The property and
business interruption insurance we carry may not have coverage
adequate to fully compensate us for losses that may occur.
If our security measures are breached and unauthorized
access is obtained, existing and potential customers might not
perceive our services as being secure and might terminate or
fail to purchase our services.
Our business involves the storage and transmission of personal
information. If third parties succeed in penetrating our network
security or otherwise misappropriate our customers’, or
their customers’, personal or credit card information, we
could be subject to liability. For example, hackers or
individuals who attempt to breach our network security could, if
successful, misappropriate personal information, suspend our
website hosting operations or cause interruptions in our
services. If we experience any breaches of our network security
or sabotage, we might be required to expend significant capital
and resources to protect against or alleviate these problems. We
may not be able to remedy any problems caused by hackers or
saboteurs in a timely manner, or at all. Because techniques used
to obtain unauthorized access or to sabotage systems change
frequently and generally are not recognized until launched
against a target, we may be unable to anticipate these
techniques or to implement adequate preventative measures. If an
actual or perceived breach of our security occurs, the
perception of the effectiveness of our security measures and our
reputation could be harmed and we could lose current and
potential customers.
These types of security breaches could result in claims against
us for unauthorized purchases with credit card information,
identity theft or other similar fraud claims as well as for
other misuses of personal
information, including for unauthorized marketing purposes,
which could result in a material adverse effect on our business
or financial condition. Moreover, these claims could cause us to
incur penalties from credit card associations, including those
resulting from our failure to adhere to industry data security
standards, termination by credit card associations of our
ability to accept credit card payments, litigation and adverse
publicity, any of which could have a material adverse effect on
our business and financial condition.
In addition, the U.S. Federal Trade Commission and certain state
agencies have investigated various Internet companies’ use
of their customers’ personal information. The federal
government has also enacted laws protecting the privacy of
consumers’ nonpublic personal information. Our failure to
comply with existing laws, including those of foreign countries,
the adoption of new laws or regulations regarding the use of
personal information that require us to change the way we
conduct our business or an investigation of our privacy
practices could increase the costs of operating our business.
Any future acquisitions could disrupt our business and
harm our financial condition and results of operations.
We may decide to acquire businesses, products or technologies in
order to expand our addressable market. We have not made any
large acquisitions to date, and therefore our ability to execute
acquisitions successfully is unproven. Any acquisition could
require significant capital outlays and could involve many
risks, including, but not limited to, the following:
•
to the extent an acquired company has a different corporate
culture from ours, we may have difficulty assimilating this
organization, which could lead to morale issues, increased
turnover and lower productivity than anticipated, and could also
have a negative impact on the culture of our existing
organization;
•
we may be required to record substantial accounting charges;
•
an acquisition may involve entry into geographic or business
markets in which we have little or no prior experience;
•
integrating acquired business operations, systems, employees,
services and technologies into our existing business, workforce
and services could be complex, time-consuming and expensive;
•
an acquisition may disrupt our ongoing business, divert
resources, increase our expenses and distract our management;
•
we may incur debt in order to fund an acquisition, or we may
assume debt or other liabilities, including litigation risk, of
the acquired company; and
•
we may have to issue equity securities to complete an
acquisition, which would dilute our stockholders’ ownership
position and could adversely affect the market price of our
Class A common stock.
Any of the foregoing or other factors could harm our ability to
achieve anticipated levels of profitability from acquired
businesses or to realize other anticipated benefits of
acquisitions. We may not be able to identify or consummate any
future acquisitions on favorable terms, or at all. If we do
effect an acquisition, it is possible that the financial markets
or investors will view the acquisition negatively. Even if we
successfully complete an acquisition, it could adversely affect
our business.
We could face liability, or our corporate image might be
impaired, as a result of the activities of our customers or the
content of their websites.
Our role as a registrar of domain names and a provider of
website hosting services may subject us to potential liability
for illegal activities by our customers on their websites. We
provide an automated service that enables users to register
domain names and populate websites with content. We do not
monitor or review the appropriateness of the domain names we
register or the content of our customer websites, and we have no
control over the activities in which our customers engage. While
we have adopted policies regarding illegal
use of our services by our customers and retain authority to
terminate domain name registrations and to take down websites
that violate these policies, customers could nonetheless engage
in these activities.
Several bodies of law may be deemed to apply to us with respect
to various customer activities. Because we operate in a
relatively new and rapidly evolving industry, and since this
field is characterized by rapid changes in technology and in new
and growing illegal activity by customers, these bodies of laws
are constantly evolving. Some of the laws that apply to us with
respect to customer activity include the following:
•
The Communications Decency Act, or CDA, generally exempts online
service providers, such as Go Daddy, from liability for the
activities of their customers unless the online service provider
is participating in the illegal conduct. However, cases that are
currently being litigated under the CDA, and cases that may be
brought in the future, may expose us to liability in the future.
•
The Digital Millennium Copyright Act of 1998, or DMCA, provides
recourse for owners of copyrighted material who believe that
their rights under U.S. copyright law have been infringed
on the Internet. Under this statute, we generally are not liable
for infringing content posted by third parties. However, if we
receive a complaint from a copyright owner alleging infringement
of its protected works by web pages for which we provide hosting
services, and we fail to remove or block access to the allegedly
infringing material, the owner may seek to impose liability on
us for contributory or vicarious infringement.
Although established statutory law and case law in these areas,
to date, have generally shielded us from liability for customer
activities, court rulings in pending or future litigation may
serve to narrow the scope of protection afforded us under these
laws. In addition, laws governing these activities are unsettled
in many international jurisdictions, or may prove difficult or
impossible for us to comply with in some international
jurisdictions. Also, notwithstanding the exculpatory language of
these bodies of law, we are frequently embroiled in complaints
and lawsuits which, even if ultimately resolved in our favor,
add cost to our doing business and may divert management’s
time and attention. Finally, other existing bodies of law may be
deemed to apply, including the criminal laws of various states,
or new statutes or regulations may be adopted in the future, any
of which could expose us to further liability and increase our
costs of doing business.
We may face liability or become involved in disputes over
registration of domain names and control over websites.
As a domain name registrar, we regularly become involved in
disputes over registration of domain names. Most of these
disputes arise as a result of a third party registering a domain
name that is identical or similar to another party’s
trademark or the name of a living person. These disputes are
typically resolved through either the Uniform Domain Name
Dispute Resolution Policy, or the UDRP, ICANN’s
administrative process for domain name dispute resolution, or
less frequently through litigation under the Anticybersquatting
Consumer Protect Act, or the ACPA, or under general theories of
trademark infringement or dilution. The UDRP generally does not
impose liability on registrars, and the ACPA provides that
registrars may not be held liable for registering or maintaining
a domain name absent a showing of bad faith intent or reckless
disregard of a court order by the registrar. However, we may
face liability if we fail to comply in a timely manner with
procedural requirements under these rules. In addition, these
processes typically require at least limited involvement by us,
and therefore increase our cost of doing business. The volume of
domain name registration disputes may be exacerbated in the
future as ICANN establishes new top level domains.
Domain name registrars also face potential tort law liability
for their role in wrongful transfers of domain names. The
leading case in this area, Kremen v. Cohen, involved
a dispute over the transfer of a particular domain name by a
domain name registrar and ultimately resulted in a significant,
multi-million dollar judgment against the registrar for its
failure to verify the accuracy of the request to transfer the
domain name and its role in effecting the transfer. The
safeguards and procedures we have adopted may not be successful
in insulating us against liability from similar claims in the
future. In addition, we face potential liability for other forms
of “domain name hijacking,” including misappropriation
by third parties of customer websites and attempts by third
parties to operate these websites or to extort the customer
whose website was misappropriated. Furthermore, our risk of
incurring liability for a security breach on a customer website
would increase if the security breach were to occur following
our sale to a customer of an SSL certificate that proved
ineffectual in preventing it. Finally, we are exposed to
potential liability as a result of our private domain name
registration service, wherein we become the domain name
registrant, on a proxy basis, on behalf of our customers. While
we have a policy of canceling privacy services on domain names
giving rise to domain name disputes, the safeguards we have in
place may not be sufficient to avoid liability in the future,
which could increase our cost of doing business.
Our standard agreements might not be enforceable.
We rely on standard agreements that govern the terms of the
services we provide to our customers. These agreements contain a
number of provisions intended to limit our potential liability
arising from providing services to our customers, including
liability resulting from our failure to register or maintain
domain names properly, from downtime or poor performance with
respect to our hosting services, or for insecure or fraudulent
transactions where we have issued SSL certificates. As most of
our customers use our services online, execution of our
agreements by customers occurs electronically or, in the case of
our terms of use, is deemed to occur because of a user’s
continued use of the website following notice of those terms. We
believe that our reliance on these agreements is consistent with
the practices in our industry, but if a court were to find that
either one of these methods of execution is invalid or that key
provisions of our services agreements are unenforceable, we
could be subject to liability that has a material adverse effect
on our business, or could be required to change our business
practices in a way that increases our cost of doing business.
The success of our business depends in large part on our
ability to protect and enforce our intellectual property
rights.
To establish and protect our intellectual property rights, we
rely on a combination of patent, copyright, service mark,
trademark and trade secret laws and contractual restrictions,
all of which offer only limited protection. We enter into
agreements with our employees and contractors, and parties with
which we do business, in order to limit access to and disclosure
of our proprietary information. The steps we have taken to
protect our intellectual property may not prevent the
misappropriation of proprietary rights or the reverse
engineering of our technology. Moreover, others may
independently develop technologies that are competitive with
ours or that infringe our intellectual property. The enforcement
of our intellectual property rights may depend on our taking
legal action against these infringers, and we cannot be sure
that these actions will be successful, even when our rights have
been infringed.
We currently have no issued patents, and existing patent
applications may not result in issued and valid patents. Any
future issued patents or registered trademarks or service marks
might not be enforceable or provide adequate protection for our
proprietary rights.
Because of the global nature of the Internet, our websites can
be viewed worldwide, but we do not have intellectual property
protection in every jurisdiction. Furthermore, effective patent,
trademark, service mark, copyright and trade secret protection
may not be available in every country in which our services
become available over the Internet. In addition, the legal
standards relating to the validity, enforceability and scope of
protection of intellectual property rights in Internet-related
industries are uncertain and still evolving.
If a third party asserts that we are infringing its
intellectual property, whether or not it is true, it could
subject us to costly and time-consuming litigation or cause us
to obtain expensive licenses, which could harm our
business.
The software and Internet industries are generally characterized
by the existence of large numbers of trade secrets, patents,
trademarks and copyrights and by frequent litigation based on
allegations of infringement or other violations of intellectual
property rights. Several of our competitors are involved in
litigation, defending against claims of patent infringement.
Third parties may assert patent and other intellectual property
infringement claims against us in the form of lawsuits, letters
or other types of communications. If a third party successfully
asserts a claim that we are infringing its proprietary rights,
royalty or licensing agreements might not be available on terms
we find acceptable, or at all. As currently pending patent
applications are not publicly available, we cannot anticipate
all such claims or know with certainty whether our technology
infringes the intellectual property rights of third parties. We
expect that the number of infringement claims will increase as
the number of services and competitors in our industry grows.
These claims against us, whether or not successful, could:
•
divert our management’s attention;
•
result in costly and time-consuming litigation;
•
require us to enter into royalty or licensing agreements, which
might not be available on acceptable terms, or at all; or
•
require us to redesign our software and services to avoid
infringement.
As a result, any third-party intellectual property claims
against us could increase our expenses and adversely affect our
business. Even if we have not infringed a third party’s
intellectual property rights, our legal defense could prove
unsuccessful and require us to expend significant financial and
management resources.
We may be unable to respond to the rapid technological
changes in the industry, particularly in light of the internal
development of our services, and our attempts to respond may
require significant capital expenditures.
The Internet and electronic commerce are characterized by rapid
technological change. Sudden changes in user and customer
requirements and preferences, the frequent introduction of new
services embodying new technologies and the emergence of new
industry standards and practices could make our services and
systems obsolete. The rapid evolution of Internet-based
applications and services will require that we continually
improve the performance, features and reliability of our
services. Our success will depend, in part, on our ability:
•
to develop new services and technologies that address the
increasingly sophisticated and varied needs of our current and
prospective customers; and
•
to respond to technological advances and emerging industry
standards and practices on a cost-effective and timely basis.
We have elected to develop substantially all of our own services
internally, rather than licensing or acquiring technology from
third-party vendors. The development of new services is complex,
and we may not be able to complete development in a timely
manner, or at all. Our internal development teams may be unable
to keep pace with new technological developments that affect the
marketplace for our services. If relevant technological
developments or changes in the market outpace our ability to
develop services demanded by current and prospective customers,
our existing services may be rendered obsolete, and we may be
forced to license or acquire software and other technology from
third parties, or we may lose existing customers and fail to
attract new customers. If we are forced to shift our strategy
toward licensing our core technology from third parties, it
could prove to be more costly than internal development and
adversely impact our operating results.
The development of services and other proprietary technology
involves significant technological and business risks and
requires substantial expenditures and lead-time. We may be
unable to use new technologies effectively or to adapt our
internally developed technologies and services to customer
requirements or emerging industry standards. In addition, as we
offer new services and functionality, we will need to ensure
that any new services and functionality are well integrated with
our current services, particularly as we offer an increasing
number of our services as part of bundled suites. To the extent
that any new services offered by us do not interoperate well
with our existing services, our ability to market and sell those
new services would be adversely affected and our revenue level
and ability to achieve and sustain profitability might be harmed.
Our business could be harmed if we are unable to sustain
the current growth in our conversion rate levels in future
periods.
A key component of our operating model is to maximize the rate
at which we are able to convert visitors to our website into
customers of our services, or our conversion rate. A number of
factors could negatively impact our conversion rate, including:
•
failure of our services to meet the needs of our customers
because of poor performance or otherwise;
•
system failures that cause our website or services to be
unavailable;
•
security breaches or negative publicity that damage our brand
and cause potential customers to lose trust in us;
•
competition, particularly if our competitors offer pricing for
comparable services at lower rates than ours; or
•
deterioration in the perception of our general level of customer
care.
If any of these or other factors causes our conversion rate to
decline or to grow more slowly than our historical rates, our
revenue growth could slow and our business could be harmed. We
may also be forced to reduce our prices to maintain or increase
our conversion rates, which would harm our margins and could
adversely affect our results of operations.
If customers fail to perceive our strong commitment to
customer care as sufficiently valuable, or if we fail to
maintain a consistently high level of customer service, then we
will not be able to realize a sufficient return on our
investment in customer care and support, and our operating
results would be harmed.
We believe our focus on customer care and support is critical to
retaining, expanding and further penetrating our customer base.
As a result, we have made significant investments in our
customer care center and our customer care organization. As of
March 31, 2006, our customer care center organization
consisted of 752 employees, or 67% of our total employees. If we
are unable to maintain a consistently high level of customer
service due to excessive turnover in our customer care personnel
or for other reasons, we may lose existing customers and find it
more difficult to attract new customers. In addition, regardless
of the performance of our customer care center, customers for
domain name registration, website hosting and other web-based
services base their purchasing decision on a number of factors,
including price, functionality of services, brand name and ease
of use. If our customers fail to perceive customer service and
support as among the more important criteria on which they base
their purchasing decisions, we may not be able to realize a
sufficient return on investment for our extensive customer care
organization, and our operating results would be harmed.
If we fail to develop and maintain proper and effective
internal controls, our ability to produce accurate financial
statements could be impaired, which could adversely affect our
operating results, our ability to conduct business and investor
confidence in our company.
We will be required, pursuant to Section 404 of the
Sarbanes-Oxley Act of 2002, to furnish a report by management on
our internal control over financial reporting for the fiscal
year ending one year after the effective date of our initial
public offering. This report will contain, among other things,
an assessment of the effectiveness of our internal control over
financial reporting, including a statement regarding whether or
not our internal control over financial reporting is effective.
This assessment will need to include disclosure of any material
weaknesses identified by our management in our internal control
over financial reporting. This report will also need to contain
a statement that our auditors have issued an attestation report
on our management’s assessment of our internal controls.
We are just beginning the costly and challenging process of
compiling the system and processing documentation before we
perform the evaluation needed to comply with Section 404.
We may not be able to complete our evaluation, testing and any
required remediation in a timely fashion. During the evaluation
and testing process, if we identify one or more material
weaknesses in our internal control over financial
reporting, we will be unable to assert that our internal control
is effective. If we are unable to assert that our internal
control over financial reporting is effective, or if our
auditors are unable to attest that our management’s report
is fairly stated or they are unable to express an opinion on the
effectiveness of our internal control, we could lose investor
confidence in the accuracy and completeness of our financial
reports, which would have a material adverse effect on the price
of our Class A common stock. Failure to comply with the new
rules might make it more difficult for us to obtain certain
types of insurance, including director and officer liability
insurance, and we might be forced to accept reduced policy
limits and coverage and/or incur substantially higher costs to
obtain the same or similar coverage. The impact of these events
could also make it more difficult for us to attract and retain
qualified persons to serve on our board of directors, on
committees of our board of directors, or as executive officers.
Our failure to register, maintain, secure, transfer or
renew the domain names that we process on behalf of our
customers or to provide our other services to our customers
without interruption could subject us to additional expenses,
claims of loss or negative publicity that have a material
adverse effect on our business.
Clerical errors and system and process failures made by us may
result in inaccurate and incomplete information in our database
of domain names and in our failure to properly register or to
maintain, secure, transfer or renew the registration of domain
names that we process on behalf of our customers. In addition,
any errors of this type might result in the interruption in
provision of our other services. Our failure to properly
register or to maintain, secure, transfer or renew the
registration of our customers’ domain names or to provide
our other services without interruption, even if we are not at
fault, might result in our incurring significant expenses and
might subject us to claims of loss or to negative publicity,
which could harm our business.
We are currently implementing a revised process to meet new
ICANN policies on how we transfer, and acknowledge the transfer
of, domain names. Pursuant to these new policies, we will no
longer be able to use certain safeguards that we had in place to
acknowledge transfer requests, which could increase the risk of
unauthorized or fraudulent transfers. These transfers could
increase claims of loss or subject us to negative publicity,
which could have a material adverse effect on our business.
Competition for qualified personnel, particularly
management personnel, can be intense. To be successful, we must
attract and retain qualified personnel.
Our future success will depend on the ability of our management
to operate effectively, both individually and as a group. The
loss of any of our senior management — particularly
Bob Parsons, our founder, chairman and chief executive
officer — or other key development or sales and
marketing personnel could adversely affect our future operating
results. We believe that Mr. Parsons has been critical to
the development of our corporate culture and corporate image,
and has been instrumental in the growth of our business to date.
If we lost the services of Mr. Parsons, we could incur
serious damage to our corporate culture and marketing focus
which, in turn, could adversely impact our ability to achieve
future growth.
We have commenced an executive search to identify an experienced
chief financial officer to succeed Michael J. Zimmerman, who is
serving as our chief accounting officer and acting chief
financial officer and as our principal financial officer during
the pendency of the search. Competition for qualified financial
executives is very intense, particularly for those candidates
who have experience as a public company chief financial officer
in the era of heightened compliance responsibilities resulting
from the Sarbanes-Oxley Act and other SEC rulemaking. We may not
be successful in hiring a qualified executive to be our chief
financial officer.
In addition, several of our key executive officers are vested as
to a significant portion of their stock option holdings, which
presents the risk that these individuals may lack sufficient
motivation to continue their employment with us in future
periods. We are also dependent on our ability to retain and
motivate high caliber personnel. Competition for qualified
management, sales, technical and other personnel can be intense,
and we may not be successful in attracting, retaining and
motivating such personnel. We generally do not have employment
contracts with our employees. The loss of the services of any of
our key personnel, the
inability to attract or retain qualified personnel in the future
or delays in hiring required personnel, particularly senior
management, sales personnel, and engineers and other technical
personnel, could negatively affect our business.
Recently adopted regulations related to equity
compensation could adversely affect our operating results and
our ability to attract and retain key personnel.
In recent years, we have used stock options as an important
component of our employee compensation packages. We believe that
stock options are an essential tool to link the long-term
interests of our stockholders and our employees, especially
executive management, and serve to motivate management to make
decisions that will, in the long run, give the best returns to
stockholders. The Financial Accounting Standards Board has
announced changes to GAAP, effective for fiscal periods
beginning after June 15, 2005, that require us to record a
charge to earnings for employee stock option grants. These
changes will adversely impact our operating results and may
adversely affect our ability to attract and retain employees. In
addition, regulations implemented by The Nasdaq Stock Market
requiring stockholder approval for all stock option plans could
make it more difficult for us to grant options to employees in
the future. To the extent that these or other new regulations
make it more difficult or expensive to grant options to
employees, we may incur increased compensation costs, change our
equity compensation strategy or find it difficult to attract,
retain and motivate employees, each of which could adversely
affect our business.
If we do not maintain a low rate of credit card
chargebacks, we may be subject to financial penalties, which
would harm our operating results.
A substantial majority of our revenue originates from online
credit card transactions. Under current credit card industry
practices, we are liable for fraudulent and disputed credit card
transactions because we do not obtain the cardholder’s
signature at the time of the transaction. If we are unable to
maintain our rate of credit card refunds below levels defined in
the credit card associations’ rules, we could face monetary
penalties and, should our credit card chargebacks become
substantially greater, we could lose our rights to accept credit
card payments from customers through one or more credit card
associations. If we fail to maintain our chargeback rates at
levels that are acceptable to the credit card associations, we
will face the risk that one or more credit card associations
may, at any time, assess penalties against us or terminate our
ability to accept credit card payments from customers, which
could harm our business and operating results.
If we are not able to secure additional financing on
favorable terms, or at all, to meet our future capital needs, we
may be unable to respond to business challenges and our business
could be harmed.
We may require additional capital to respond to business
challenges, including the need to develop new or enhance
existing services or enhance our operating infrastructure, fund
expansion, respond to competitive pressures and acquire
complementary businesses, services and technologies. Absent
sufficient cash flows from operations, we may need to engage in
equity or debt financings to secure additional funds to meet our
operating and capital needs. We may not be able to secure
additional debt or equity financing on favorable terms, or at
all, at the time when we need that funding. In addition, even
though we may not need additional funds, we may still elect to
sell additional equity or debt securities or obtain credit
facilities for other reasons. If we raise additional funds
through further issuances of equity or convertible debt
securities, our existing stockholders could suffer significant
dilution in their percentage ownership of our company, and any
new equity securities we issue could have rights, preferences
and privileges senior to those of holders of our common stock
classes, including shares of Class A common stock sold in
this offering. Any debt financing secured by us in the future
could involve restrictive covenants relating to our capital
raising activities and other financial and operational matters,
which might make it more difficult for us to obtain additional
capital, to pay dividends and to pursue business opportunities,
including potential acquisitions. In addition, if we decide to
raise funds through debt or convertible debt financings, we may
be unable to meet our interest or principal payments.
Governmental and regulatory policies or claims concerning
the domain name registration system, and industry reactions to
those policies or claims, may cause instability in the industry
and disrupt our domain name registration business.
ICANN Oversight of Domain Name Registration System
In November 1998, the U.S. Department of Commerce
authorized ICANN to oversee key aspects of the domain name
registration system. Since then, ICANN has been subject to
scrutiny by the U.S. government. For example, Congress has
held hearings to evaluate ICANN’s selection process for new
top level domains. In addition, ICANN faces significant
questions regarding its financial viability and efficacy as a
private sector entity. ICANN may continue to alter both its
long-term structure and its mission to address perceived
shortcomings such as a lack of accountability to the public and
a failure to maintain a diverse representation of interests on
its board of directors. In May 2001, ICANN and VeriSign, Inc.
entered into an agreement under which VeriSign would operate the
..com top level domain registry until 2007, when the original
agreement expires. ICANN and VeriSign have recently proposed
renewal of this agreement through 2012, which, if given final
approval by the U.S. Department of Commerce, could lead to
VeriSign’s continuing to operate the .com top level domain
under this agreement indefinitely. We continue to face the risks
that:
•
ICANN and VeriSign, under their new proposed agreement, may
impose increased fees received for each .com domain name
registration, which could put pressure on our operating results
and pricing strategy;
•
the U.S. or any other government may reassess its decision
to introduce competition into, or ICANN’s role in
overseeing, the domain name registration market;
•
the terms of the registrar accreditation process could change in
ways that are disadvantageous to us;
•
the Internet community or the U.S. Department of Commerce
or U.S. Congress may refuse to recognize ICANN’s
authority or support its policies, which could create
instability in the domain name registration system; and
•
international regulatory bodies, such as the International
Telecommunications Union, the United Nations or the European
Union, may gain increased influence over the management and
regulation of the domain name registration system, leading to
increased regulation in areas such as taxation and privacy.
If any of these events occurs, it could create instability in
the domain name registration system. These events could also
disrupt or cause suspension of portions of our domain name
registration business, which would result in dramatically
reduced revenue.
Governmental Regulation Affecting the Internet
To date, government regulations have not materially restricted
use of the Internet in most parts of the world. The legal and
regulatory environment pertaining to the Internet, however, is
uncertain and may change. New laws may be passed, existing laws
may be deemed to apply to the Internet, or existing legal safe
harbors may be narrowed, both by U.S. federal or state
governments and by governments of foreign jurisdictions. These
changes could affect:
•
liability of online service providers for actions by customers,
including fraud, illegal content, spam, phishing, libel and
defamation, infringement of third-party intellectual property
and other abusive conduct;
•
other claims based on the nature and content of Internet
materials, such as pornography;
sales and other taxes, including the value-added tax of the
European Union member states;
•
characteristics and quality of services; and
•
cross-border commerce.
The adoption of any new laws or regulations, or the new
application or interpretation of existing laws or regulations to
the Internet, could hinder growth in use of the Internet and
other online services generally, and decrease acceptance of the
Internet and other online services as a means of communications,
commerce and advertising. In addition, it could increase our
costs of doing business, subject our business to increased
liability or prevent us from delivering our services over the
Internet, thereby harming our business and results of operations.
Each registry and the ICANN regulatory body impose a
charge upon each registrar for the administration of each domain
name registration. If these fees increase, it would have a
significant impact upon our operating results.
Each domain name registry imposes a fee for the registration of
each domain name. For example, at present, VeriSign charges a
$6.00 fee for names in the .com TLD. ICANN currently imposes a
$0.25 charge for each domain name registered in the TLDs that
fall within its purview. We, in turn, currently charge our
customers $8.95 for the registration of a .com domain name for a
one-year term, and this price includes basic
advertising-supported shared website hosting, free blog service
and a single email account. We have no control over registries
or ICANN and generally cannot predict when they may increase
their respective fees. If the U.S. Department of Commerce
approves the new registry agreement that VeriSign and ICANN
recently proposed, VeriSign would continue as the exclusive
registry for the .com TLD and would be entitled to increase the
fee it receives for each .com domain name registration by 7%
annually in four of the six years through 2012, and potentially
beyond that date. Any increase in registry or ICANN fees must be
imposed as a surcharge or otherwise factored into the prices we
charge our customers. If we absorb these cost increases, or if
these surcharges act as a deterrent generally to the growth in
domain name registration, we might find that our operating
results are adversely impacted by these third-party fees.
As the number of available domain names diminishes over
time, our domain name registration revenue and our overall
business could be adversely impacted.
As the number of available domain names diminishes over time,
and if it is perceived that the most desirable domain names are
generally unavailable, fewer Internet users might register
domain names with us. There are a number of practices in the
domain name marketplace, including domain name
“tasting” and domain name “monetizing,” that
result in desirable domain names rapidly becoming unavailable.
Domain name tasting involves registering large numbers of domain
names, with the intent of using the five-day grace period after
initial registration to decide which domain names are most
valuable, and then dropping the registration of the vast
majority of those domain names which prove to be less valuable.
Domain name monetizing involves utilizing domain names to
generate paid, click-through advertising revenue from one-page
websites, rather than building an active website. If domain name
tasting and monetizing or other market practices that could
develop significantly diminish the number of available domain
names that are perceived as valuable, it could have an adverse
effect on our domain name registration revenue and our overall
business.
Our business and financial condition could be harmed
materially if the administration and operation of the Internet
no longer were to rely upon the existing domain name
system.
The domain name registration market continues to develop and
adapt to changing technology. This development may include
changes in the administration or operation of the Internet,
including the creation and institution of alternate systems for
directing Internet traffic without using the existing domain
name system. Some of our competitors have begun registering
domain names with extensions that rely on these alternate
systems. These competitors are not subject to ICANN
accreditation requirements and restrictions. In particular,
competitors who develop workarounds to the existing domain name
registration system may be able to avoid paying fees to the
registry for domain names, which would give them a pricing
advantage over
us. Other competitors have attempted to introduce naming systems
that use keywords rather than traditional domain names. The
widespread acceptance of any alternative system could eliminate
the need to register a domain name to establish an online
presence and could materially adversely affect our business.
Also, since approximately 73% of our domain names under
management as of April 30, 2006 were in the .com TLD, we
are substantially dependent upon the continued viability of
VeriSign, which serves as the sole registry of the .com TLD. If
VeriSign were unable to continue to operate as a registry for
..com domain names in its current manner as a result of financial
difficulties, regulatory restrictions, litigation or otherwise,
our .com domain name registration revenue could decline, which
would harm our financial condition and results of operations.
The introduction of tax laws targeting companies engaged
in electronic commerce could materially adversely affect our
business, financial condition and results of operations.
We file tax returns in those countries and states where existing
regulations applicable to traditional businesses require these
filings. However, one or more countries or states could seek to
impose additional income tax obligations or sales tax collection
obligations on
out-of-jurisdiction
companies, such as ours, that engage in or facilitate electronic
commerce. A number of proposals have been made at various
governmental levels that could impose taxes on the sale of
services through the Internet or on the income derived from
these sales. These proposals, if adopted, could substantially
impair the growth of electronic commerce and materially
adversely affect our business, financial condition and results
of operations.
On December 3, 2004, the President of the United States
signed into law an extension of a moratorium on certain state
and local taxation of online services and electronic commerce
until November 1, 2007. This legislation is not a permanent
ban, and any future imposition of these taxes could materially
adversely affect our business, financial condition and results
of operations.
In addition, on July 1, 2003, the European Union required
EU member states to implement a directive requiring non-EU
providers of electronically supplied services to private
individuals and non-business organizations in the EU to impose
value-added taxes, or VAT, on these services. We anticipate that
EU member states will be commencing their enforcement efforts in
this area in the near term. Many tax authorities of the member
states have yet to publish official guidance on the rules, but
we already know that, if we are required to comply with this
directive, we will have to implement system changes. These
systems changes may be significant, and it is not yet clear
which of our services, if any, would be subject to this
directive. If one or more of our services were determined to be
subject to this directive, we would not be in compliance with
this directive and, as a result, we might be subject to
enforcement proceedings relating to claims for VAT, plus
interest and/or penalties, which could harm our business. In
addition, imposition of VAT might also lead to some of the
services that we offer in EU countries becoming more expensive
relative to services rendered in those countries by EU
businesses, which would put us at a competitive disadvantage if
we were to pass along the VAT to our customers, or would reduce
our profit margin if we were to absorb the VAT as an additional
cost to our business.
We are responsible for charging end customers certain taxes in
numerous international jurisdictions. In the ordinary course of
our business, there are many transactions and calculations where
the ultimate tax determination is uncertain. In the future, we
may come under audit which could result in changes to our tax
estimates. We believe that it maintains adequate tax reserves to
offset the potential liabilities that may arise upon audit.
Although we believe our tax estimates and associated reserves
are reasonable, the final determination of tax audits and any
related litigation could be materially different than the
amounts established for tax contingencies. To the extent that
such estimates ultimately prove to be inaccurate, the associated
reserves would be adjusted resulting in our recording a benefit
or expense in the period a final determination is made.
If Internet usage does not grow, or if the Internet does
not continue to expand as a medium for information,
communication and commerce, our business may suffer.
Our success depends upon continued development and acceptance of
the Internet as a medium for information, communication and
commerce. The use of the Internet may not continue to grow at a
pace similar to that of recent years, either within the
U.S. or in international markets as a result of a variety
of factors, including inadequate Internet infrastructure,
security problems or privacy concerns. Any of these and a
variety of other issues could slow the growth of the Internet,
which could have an adverse effect on our results of operations.
Risks Related to This Offering and Our Class A Common
Stock
The lower voting power of the Class A common stock
relative to our Class B common stock may negatively affect
the market value of our Class A common stock.
Upon completion of this offering, we will have two classes of
common stock: Class A common stock, which is the stock that
we and the selling stockholders are selling in this offering and
which entitles holders to one vote per share, and Class B
common stock, all of which will be held by Bob Parsons and which
will entitle him to two votes per share. Except in certain
limited circumstances required by applicable law, holders of
Class A common stock and Class B common stock will
vote together as a single class on all matters to be voted on by
our stockholders. Immediately prior to the consummation of this
offering, 36,601,656 shares of Class B common stock
will be outstanding. Therefore, after closing of this offering
approximately %
of the total voting power of our outstanding shares will be held
by Mr. Parsons. The difference in the voting power of our
Class A common stock and Class B common stock could
diminish the market value of our Class A common stock if
investors attribute value to the superior voting rights of our
Class B common stock and the power those rights confer.
For the foreseeable future, Bob Parsons or his affiliates
will be able to control the selection of all members of our
board of directors, as well as virtually every other matter that
requires stockholder approval, which will severely limit the
ability of other stockholders to influence corporate
matters.
Upon completion of this offering, Bob Parsons will own all of
our Class B common stock. Pursuant to our certificate of
incorporation, the holder of our Class B common stock may
generally transfer such shares to family members and their
lineal descendents, without those shares automatically
converting into shares of Class A common stock. Because of
this dual class structure and the number of shares he owns, Bob
Parsons, his affiliates, and his family members and lineal
descendents will have significant influence over our management
and affairs, and will be able to control virtually all matters
requiring stockholder approval, including the election of
directors and significant corporate transactions such as mergers
or other sales of our company or assets, even if they come to
own considerably less than 50% of the total number of
outstanding shares of our Class A and Class B common
stock. Moreover, these persons may take actions in their own
interests that you or our other stockholders do not view as
beneficial. So long as Bob Parsons and his affiliates continue
to control shares of Class B common stock representing more
than one-third of the total number of outstanding shares of our
Class A and Class B common stock combined, they will
control a majority of the combined voting power of the
Class A and Class B common stock.
We will incur increased costs and demands upon management
as a result of complying with the laws and regulations affecting
public companies, which could affect our operating
results.
As a public company, we will incur significant legal, accounting
and other expenses that we did not incur as a private company,
including costs associated with public company reporting
requirements. We also have begun to incur and will incur
substantial costs associated with recently adopted corporate
governance requirements, including requirements under the
Sarbanes-Oxley Act, as well as new rules implemented by the
Securities and Exchange Commission, or SEC, and The Nasdaq Stock
Market. In addition, our management team will also have to adapt
to the requirements of being a public company, as none of our
senior executive officers has significant experience as an
executive in the public company environment since the adoption of
the Sarbanes-Oxley Act. The expenses incurred by public
companies generally for reporting and corporate governance
purposes have been increasing. We expect recent rules and
regulations to increase our legal and financial compliance costs
and to make some activities more time-consuming and costly,
although we are unable currently to estimate these costs with
any degree of certainty. We also expect these new rules and
regulations may make it more difficult and more expensive for us
to obtain director and officer liability insurance, and we may
be required to accept reduced policy limits and coverage or
incur substantially higher costs to obtain the same or similar
coverage that used to be available. As a result, it may be more
difficult for us to attract and retain qualified individuals to
serve on our board of directors, on committees of our board of
directors or as our executive officers.
An active, liquid and orderly trading market for our
Class A common stock may not develop.
Prior to this public offering, there has been no public market
for any shares of our common stock. We, the selling stockholders
and the representatives of the underwriters will determine the
initial public offering price of our Class A common stock
through negotiation. This price will not necessarily reflect the
price at which investors in the market will be willing to buy
and sell our shares following this offering. In addition, the
trading price of our Class A common stock following this
offering is likely to be highly volatile and could be subject to
wide fluctuations in response to various factors, some of which
are beyond our control. These factors include:
•
quarterly variations in our results of operations or those of
our competitors;
•
our ability to develop and market new and enhanced services on a
timely basis;
•
announcements by us or our competitors of significant
acquisitions, new services, contracts, commercial relationships
or capital commitments;
•
whether we are able to introduce new services successfully to
our customers;
•
the emergence of new markets that may affect our existing
business or in which we may not be able to compete effectively;
•
commencement of, our involvement in, or results of litigation;
•
changes in governmental regulations or in the status of our
ICANN accreditation or regulatory approvals;
•
changes in earnings estimates or recommendations by any public
market analysts who elect to follow our stock;
•
any major change in our board of directors or management;
•
general economic conditions and slow or negative growth of our
markets; and
•
political instability, natural disasters, war and/or events of
terrorism.
In addition, the stock market in general, and the market for
Internet companies’ stock in particular, have experienced
extreme price and volume fluctuations that have often been
unrelated or disproportionate to the operating performance of
those companies. Broad market and industry factors may seriously
affect the market prices of companies’ stock, including
ours, regardless of their actual operating performance. These
fluctuations may be even more pronounced in the trading market
for our Class A common stock shortly following this
offering. In addition, in the past, following periods of
volatility in the overall market and the market prices of
particular companies’ securities, securities class action
litigation has often been instituted against these companies.
This type of litigation, if instituted against us, could result
in substantial costs and a diversion of our management’s
attention and resources.
Provisions in our certificate of incorporation and bylaws
and under Delaware law could discourage a takeover that
stockholders may consider favorable.
Provisions in our certificate of incorporation and bylaws may
have the effect of delaying or preventing a change of control or
changes in our management. These provisions include the
following:
•
Our certificate of incorporation provides for a dual class
common stock structure. As a result of this structure and the
number of shares he owns, Bob Parsons and his family members and
their lineal descendents will have control over virtually all
matters requiring stockholder approval, including the election
of directors and significant corporate transactions, such as
mergers or other sales of our company or its assets. This
concentrated control could discourage others from initiating any
potential merger, takeover or other change of control
transaction that our other stockholders may view as beneficial.
•
Our board of directors has the sole right to elect a director to
fill a vacancy created by the expansion of the board of
directors or the resignation, death or removal of a director,
which prevents stockholders from being able to fill vacancies on
our board of directors.
•
When the holders of our Class B common stock no longer hold
a majority of the combined voting power of our outstanding
shares of Class A and Class B common stock, our
stockholders will no longer be able to act by written consent.
As a result, a holder or holders controlling a majority of the
combined voting power of our outstanding shares of Class A
and Class B common stock at that time would not be able to
take certain actions except at a stockholders’ meeting.
•
Our certificate of incorporation prohibits cumulative voting in
the election of directors. This will limit the ability of
holders of Class A common stock and minority stockholders
to elect director candidates.
•
Our board of directors is classified so that only a portion of
our board will be elected each year. This could discourage proxy
contests and make it more difficult for our stockholders to
elect a new board of directors and discourage a change in
control.
•
Stockholders must provide advance notice to nominate individuals
for election to the board of directors or to propose matters to
be acted upon at a stockholders’ meeting. These provisions
may discourage or deter a potential acquiror from conducting a
solicitation of proxies to elect the acquiror’s own slate
of directors or otherwise attempting to obtain control of our
company.
•
Our certificate of incorporation authorizes us to issue shares
of preferred stock with rights designated by our board of
directors, without further stockholder approval. While this
provides desirable flexibility in connection with possible
acquisitions and other corporate purposes, any issued preferred
stock could have the effect of delaying, discouraging or
preventing a change in control of our company.
As a Delaware corporation, we are also subject to certain
Delaware anti-takeover provisions. Under Delaware law, a
corporation may, in general, not engage in a business
combination with any holder of 15% or more of its capital stock
unless the holder has held the stock for three years or, among
other things, the board of directors has approved the
transaction.
Purchasers in this offering will experience immediate and
substantial dilution in the book value of their
investment.
The initial public offering price of our Class A common
stock will be substantially higher than the net tangible book
value per share of our Class A common stock immediately
after this offering. Therefore, if you purchase our Class A
common stock in this offering, you will incur an immediate
dilution of
$ in
net tangible book value per share from the price you paid, based
on an assumed initial public offering price of
$ per
share. In addition, following this offering, purchasers in the
offering will have
contributed %
of the total consideration paid by stockholders to the company
to purchase shares of Class A and Class B common
stock, but will own
only %
of the total combined number of shares of our outstanding
classes of common stock. The exercise of outstanding options
will result in further dilution.
Future sales of shares by our existing stockholder or
existing option holders could cause our stock price to
decline.
If our existing stockholder or any of our existing option
holders sells, or indicates an intention to sell, substantial
amounts of our Class A common stock in the public market
after the lock-up and
other legal restrictions on resale discussed in this prospectus
lapse, the trading price of our Class A common stock could
decline. Based on shares outstanding as of December 31,2005, upon closing of this offering, we will have outstanding a
total
of shares
of Class A and Class B common stock. Of these shares,
only
the shares
of Class A common stock sold in this offering by us and the
selling stockholders will be freely tradable, without
restriction, in the public market. Lehman Brothers and Merrill
Lynch, however, may, in their sole discretion, permit our
existing stockholder or option holders, who are subject to the
contractual lock-up, to
sell shares prior to the expiration of the
lock-up agreement.
We expect that the
lock-up agreements
pertaining to this offering will expire 180 days from the
date of this prospectus, although those
lock-up agreements may
be extended for up to an additional 35 days under certain
circumstances. After the
lock-up agreements
expire, up to an
additional shares
of Class A common stock that are issuable upon conversion
of shares of our Class B common stock held by Bob Parsons
will be eligible for sale in the public market, subject to
volume limitations under Rule 144 under the Securities Act
of 1933, as amended, or the Securities Act. In addition, upon
expiration of the
lock-up agreements, up
to 6,342,900 shares of Class A common stock that were
subject to options outstanding as of December 31, 2005,
other than shares exercised by a selling stockholder to sell
shares in this offering, will become eligible for sale in the
public market to the extent vested under the provisions of
various option agreements. If these additional shares are sold,
or if it is perceived that they may be sold, in the public
market, the trading price of our Class A common stock could
decline.
Because management has broad discretion regarding the use
of the net proceeds from this offering, you may not agree with
how we use them, and these proceeds may not be invested
successfully.
Our management will have broad discretion with respect to the
net proceeds we receive from this offering. We currently intend
to use the net proceeds from the offering for the repayment of
currently outstanding indebtedness and for working capital and
other general corporate purposes. You will be relying on the
judgment of our management concerning these uses, and you will
not have the opportunity, as part of your investment decision,
to assess whether the proceeds will be used appropriately. The
failure of our management to apply these funds effectively could
result in unfavorable returns and uncertainty about our
prospects, either of which could cause the price of our
Class A common stock to decline.
This prospectus, particularly in the sections entitled
“Prospectus Summary,”“Risk Factors,”“Management’s Discussion and Analysis of Financial
Condition and Results of Operations” and
“Business,” contains forward-looking statements that
are subject to substantial risks and uncertainties. All
statements other than statements of historical facts contained
in this prospectus, including statements regarding our future
financial position, the statements under the caption “Our
Strategy” in the “Prospectus Summary” section,
the statements under the caption “Our Growth Strategy”
in the “Business” section, other statements regarding
our strategies for growth, current development initiatives and
future service offerings, statements regarding planned
expenditures, including capital expenditures, expansion of our
research and development and customer care and support
organizations, and statements regarding other aspects of our
business strategy, and plans and objectives for future
operations, are forward-looking statements. In some cases, you
can identify forward-looking statements by terms such as
“believe,”“may,”“estimate,”“continue,”“anticipate,”“intend,”“should,”“plan,”“expect,”“predict” or
“potential,” the negative of these terms or other
similar expressions. We have based these forward-looking
statements largely on our current expectations and projections
about future events and financial trends that we believe may
affect our financial condition, results of operations, business
strategy and financial needs. These forward-looking statements
are subject to a number of risks, uncertainties and assumptions
described in the section entitled “Risk Factors” and
elsewhere in this prospectus. We qualify all of our
forward-looking statements by these cautionary statements.
Moreover, we operate in a very competitive and rapidly changing
environment. New risks emerge from time to time. It is not
possible for our management to predict all risks, nor can we
assess the impact of all factors on our business or the extent
to which any factor, or combination of factors, may cause actual
results to differ materially from those contained in any
forward-looking statements we may make. Before investing in our
Class A common stock, investors should be aware that the
occurrence of the risks, uncertainties and events described in
the section entitled “Risk Factors” and elsewhere in
this prospectus could have a material adverse effect on our
business, results of operations and financial condition.
You should not rely upon forward-looking statements as
predictions of future events. Although we believe that the
expectations reflected in the forward-looking statements are
reasonable, we cannot guarantee that the future results, levels
of activity, performance or events and circumstances reflected
in the forward-looking statements will be achieved or occur.
Moreover, neither we nor any other person assumes responsibility
for the accuracy and completeness of the forward-looking
statements. We undertake no obligation to update publicly any
forward-looking statements for any reason after the date of this
prospectus to conform these statements to actual results or to
changes in our expectations.
This prospectus also contains statistical data and estimates,
including those relating to market size and growth rates of the
markets in which we participate, that we obtained from industry
publications and reports generated by Euromonitor International,
ICANN, IDC, Netcraft, the U.S. Census Bureau and Zooknic.
These publications generally indicate that they have obtained
their information from sources they believe to be reliable, but
do not guarantee the accuracy and completeness of their
information. Although we believe the publications are reliable,
we have not independently verified their data.
You should read this prospectus and the documents that we
reference in this prospectus and have filed with the SEC as
exhibits to the registration statement of which this prospectus
is a part with the understanding that our actual future results,
levels of activity, performance and events and circumstances may
be materially different from what we expect.
We estimate that we will receive net proceeds of
$ million
from our sale of
the shares
of Class A common stock offered by us in this offering,
based on an assumed initial public offering price of
$ per
share, after deducting estimated underwriting discounts and
commissions and estimated offering expenses payable by us.
Members of our senior management are selling shares in this
offering — see “Principal and Selling
Stockholders.” We will not receive any of the net proceeds
from the sale of shares by the selling stockholders.
The principal purposes of this offering are to obtain additional
capital, to create a public market for our Class A common
stock and to facilitate our future access to the public equity
markets. We intend to use a portion of the net proceeds to repay
the entire outstanding balance under the loan from U.S. Bank
described below, which was approximately $7.0 million as of
March 31, 2006. We also anticipate that we will use the net
proceeds received by us from this offering for working capital
and other general corporate purposes, including expansion of our
customer care and support and research and development
organizations, capital expenditures, including further
investment in the build-out of our data center and network
infrastructure to support our growth, and the further
development and expansion of our service offerings. In addition,
we may use a portion of the proceeds of this offering for
possible acquisitions of complementary businesses, technologies
or other assets. We have no current agreements or commitments
with respect to any acquisitions.
In October 2005, we obtained a $7.1 million loan from
U.S. Bank to finance the purchase of a building that we
intend to use as a data center. The loan bears interest at a
rate of 2.10% plus one-month LIBOR. We have entered into an
interest rate swap to fix this rate at 6.98%. In October 2005,
we also entered into a $1.5 million credit facility with
U.S. Bank for the purchase of data center equipment. Any
borrowing under the credit facility would bear interest at the
prime rate until July 31, 2006. Starting on August 1,2006, borrowing under the credit facility would bear interest at
the rate of 2.10% plus one-month LIBOR. As of March 31,2006, no balance was outstanding under this credit facility.
The amounts and timing of our actual expenditures will depend on
numerous factors, including the amount of cash used in or
generated by our operations, the status of our development
efforts, sales and marketing activities, technological advances
and competitive pressures. We therefore cannot estimate the
amount of the net proceeds to be used for any of the purposes
described above. We may find it necessary or advisable to use
our net proceeds for other purposes, and we will have broad
discretion in the application of our net proceeds. Pending the
uses described above, we intend to invest the net proceeds from
the sale of shares of our Class A common stock sold by us
in this offering in short-term, interest-bearing, investment
grade securities. We have implemented and maintain a prescribed
investment policy in regards to our cash investments.
DIVIDEND POLICY
Since our inception in 1997, we have operated as a subchapter
S corporation. Since 2002, we have made regular
distributions to this stockholder based on our funds available
for distribution. In 2004, we made distributions aggregating
approximately $5.1 million to this stockholder. In 2005, we
made distributions aggregating approximately $4.8 million
to this stockholder. In addition, in 2006 we expect to make
distributions of approximately $3.8 million to this
stockholder prior to the time that we convert from a subchapter
S corporation to a subchapter C corporation.
Following our conversion to a subchapter C corporation and this
offering, we do not currently expect to pay any cash dividends.
We expect to retain future earnings, if any, to fund the
development and growth of our business. Any future determination
to pay dividends on our common stock will be at the discretion
of our board of directors and will depend upon, among other
factors, our results of operations, financial condition, capital
requirements and contractual restrictions.
The following table sets forth our capitalization as of
December 31, 2005:
•
on an actual basis;
•
on a pro forma basis to give effect to aggregate distributions
of $3.8 million to be paid in 2006 to our sole stockholder,
our reincorporation and institution of a dual-class capital
structure, and the exercise of stock options to
purchase shares
of Class A common stock by a selling stockholder in order
to sell shares in this offering; and
•
on a pro forma as adjusted basis to give effect to the automatic
conversion of the shares being sold by a selling stockholder in
this offering from Class B common stock to Class A common stock,
our receipt of the net proceeds from the sale
of shares
of our Class A common stock offered by us at an assumed
initial public offering price of
$ per
share, after deducting estimated underwriting discounts and
commissions and estimated offering expenses payable by us, and
our use of proceeds from this offering to repay approximately
$7.0 million of outstanding indebtedness.
You should read this table together with “Management’s
Discussion and Analysis of Financial Condition and Results of
Operations” and our consolidated financial statements and
the related notes, each included elsewhere in this prospectus.
Pro Forma
Actual
Pro Forma
As Adjusted
(In thousands, except share
and per share data)
Cash, cash equivalents and short-term investments
$
13,599
$
$
Total long-term debt, including current portion
$
7,043
$
7,043
$
—
Stockholders’ equity (deficit):
Common stock, $.01 par value, 50,000,000 authorized, 36,601,656
shares issued and outstanding, actual; no shares issued and
outstanding pro forma or pro forma as adjusted
366
—
—
Class A common stock, $.001 par value, 200,000,000
authorized, no shares issued or outstanding,
actual; shares issued and
outstanding, pro
forma; shares
issued and outstanding, pro forma as adjusted
—
Class B common stock, $.001 par value, 36,601,656
authorized, no shares issued and outstanding, actual;
36,601,656 shares issued and outstanding pro
forma; shares issued and
outstanding, pro forma as adjusted
—
366
Preferred stock, $.001 par value, 10,000,000 authorized, no
shares issued and outstanding
—
—
—
Additional paid-in capital
—
—
Accumulated deficit
(30,428
)
Accumulated other comprehensive loss
(124
)
(124
)
(124
)
Total stockholder’s equity (deficit)
(30,186
)
Total capitalization
$
(23,143
)
$
$
The actual column of the table above excludes
6,700,000 shares of Class A common stock reserved for
issuance under our 2002 stock option plan, of which
6,342,900 shares at a weighted average exercise price of
$1.93 per share were subject to outstanding options as of
December 31, 2005.
If you invest in our Class A common stock in this offering,
your interest will be diluted to the extent of the difference
between the initial public offering price per share of our
Class A common stock and the pro forma as adjusted net
tangible book value per share of our Class A common stock
after this offering. Net tangible book value per share
represents the amount of our total tangible assets less total
liabilities, divided by the total number of shares of
Class A and Class B common stock outstanding.
The pro forma net tangible book value of our Class A and
Class B common stock as of December 31, 2005 was
$(33.9) million, or $(0.92) per share of Class A
and Class B common stock outstanding. The pro forma net
tangible book value of our Class A and Class B common
stock gives effect to aggregate distributions of
$3.8 million to be paid in 2006 to our sole stockholder
prior to our reincorporation, the reincorporation and
institution of a dual-class capital structure, and the exercise
of stock options to
purchase shares
of our Class A common stock by a selling stockholder in
order to sell shares in this offering. Assuming the sale by us
of shares
of Class A common stock offered in this offering at an
initial public offering price of
$ per
share, after deducting estimated underwriting discounts and
commissions and estimated offering expenses payable by us, and
after the application of offering proceeds to repay
$7.0 million in outstanding indebtedness, the pro forma as
adjusted net tangible book value of our Class A and
Class B common stock as of December 31, 2005 would
have been
$ ,
or
$ per
share. This represents an immediate increase of net tangible
book value of
$ per
share to our existing stockholders and an immediate dilution of
$ per
share to new investors purchasing shares in this offering. The
following table illustrates this per share dilution:
Assumed initial public offering price per share
$
Historical net tangible book value per share of common stock as
of December 31, 2005, before giving effect to this offering
$
(0.92
)
Pro forma increase per share attributable to investors
purchasing shares in this offering
Pro forma as adjusted net tangible book value per share after
giving effect to this offering
Dilution in pro forma as adjusted net tangible book value per
share to investors in this offering
$
The following table sets forth on the same pro forma as adjusted
basis, as of December 31, 2005, the number of shares of
Class A common stock purchased or to be purchased from us,
the total consideration paid or to be paid and the average price
per share paid or to be paid by our existing stockholders and by
the new investors, before deducting estimated underwriting
discounts and commissions and estimated offering expenses
payable by us:
Total
Shares Purchased
Consideration
Average Price
Number
Percent
Amount
Per Share
Existing stockholders
%
$
*
$
*
New public investors
Total
100
%
$
*
The amount of aggregate distributions to stockholders prior to
this offering exceeds the total consideration paid for such
shares.
If the underwriters exercise their over-allotment option in
full, our existing stockholders would
own % and our new investors would
own % of the total combined number
of shares of our Class A and Class B common stock
outstanding upon closing of this offering,
representing %
and % of the combined voting power
of such shares of Class A and Class B common stock,
respectively, as a result of our dual-class structure.
The above discussion and table assume no exercise, other than
the exercise of stock options by a selling stockholder described
above, of stock options to purchase 6,342,900 shares of
Class A common stock outstanding as of December 31,2005, with a weighted average exercise price of $1.93 per
share. If all of these options were exercised, then our existing
stockholders, including the holders of these options, would
own % and our new investors would
own % of the total combined number
of shares of our Class A and Class B common stock
outstanding upon closing of this offering,
representing %
and % of the combined voting power
of such shares of Class A and Class B common stock,
respectively.
SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA
We present below our selected consolidated financial and
operating data. The selected consolidated statement of
operations and statement of cash flows data for the years ended
December 31, 2003, 2004 and 2005 and the selected
consolidated balance sheet data as of December 31, 2004 and
2005 have been derived from our audited consolidated financial
statements included elsewhere in this prospectus. The selected
consolidated statement of operations data for the years ended
December 31, 2001 and 2002 and the selected consolidated
balance sheet data as of December 31, 2001, 2002 and 2003
have been derived from our audited consolidated financial
statements not included in this prospectus. Our historical
results are not necessarily indicative of the results to be
expected in any future period.
You should read this information together with
“Management’s Discussion and Analysis of Financial
Condition and Results of Operations” and our consolidated
financial statements and related notes, each included elsewhere
in this prospectus.
Shares used to compute basic and diluted net loss per share
36,601,656
36,601,656
36,601,656
36,601,656
36,601,656
(1)
Excluding depreciation and amortization, which is shown
separately.
We are a subchapter S corporation and therefore we have not
reflected deferred taxes in our consolidated financial
statements. We are not required to pay corporate federal and
state income taxes until the revocation of our subchapter S
corporation status. The statements of operations data do not
include a pro forma adjustment for income taxes, calculated in
accordance with SFAS No. 109, Accounting for Income
Taxes, that would have been recorded if we were a
subchapter C corporation, because we would have provided a
full valuation allowance on our net deferred tax assets and as
such no income tax provision would be recorded.
The following discussion and analysis of our financial
condition and results of operations should be read in
conjunction with the consolidated financial statements and
related notes included elsewhere in this prospectus. This
discussion contains forward-looking statements reflecting our
current expectations that involve risks and uncertainties.
Actual results and the timing of events may differ materially
from those contained in these forward-looking statements due to
a number of factors, including those discussed in the section
entitled “Risk Factors” and elsewhere in this
prospectus.
Overview
We are a leading provider of services that enable individuals
and businesses to establish, maintain and evolve an online
presence. We derive our revenue primarily from domain name
registration, website hosting and on-demand and other services.
We are the world’s largest domain name registrar, with
approximately 13.6 million domain names under management as
of April 30, 2006, and North America’s largest shared
website hosting provider. We target the individual and small
business markets by seeking to provide a “one-stop
shop” for establishing and maintaining an online presence.
Our domain name registration services act as a gateway product
for our website hosting, on-demand and other services. We
increased total revenue from $4.3 million in 2001 to
$139.8 million in 2005.
Our company was founded in January 1997 as Jomax Technologies by
Bob Parsons, our chairman, chief executive officer and, prior to
this offering, our sole stockholder. In 1998, we introduced our
first software application, which allowed customers to create
their own websites, and started offering shared website hosting
services. In 2000, we became an accredited domain name registrar
and began to offer domain name registration services. Since
2001, we have introduced many new services, including email,
ecommerce tools, website analytics, SSL certificates and
on-demand website creation services, among others. We have
operated as a subchapter S corporation since inception, but
in connection with this offering we are converting Go Daddy into
a subchapter C corporation.
Our business model is characterized by non-refundable, up-front
payments, which lead to recurring revenue and positive operating
cash flow. We currently offer over 30 value-oriented services,
which can be purchased independently or as bundled suites
targeted to meet the specific needs of our customers. We offer
our services through our websites and our customer care center.
We also offer our services through our wholly-owned subsidiary,
Wild West Domains, which manages over 20,000 resellers of our
services.
Key Business Metrics
We monitor a number of key business metrics to help forecast
growth, establish budgets and measure the effectiveness of our
marketing efforts and operational strategies. These metrics
include:
Operating Cash Flow. Our goal is to generate long-term,
sustainable growth in operating cash flow. Customers register
domain names and purchase most of our other services by entering
into contracts that are paid up-front, but for which we
typically recognize the associated revenue ratably over the
contractual term. Similarly, we pay an up-front fee to the
relevant registry for each domain name registration and we
recognize this expense ratably over the term of the domain name
registration contract. Because of our revenue and cost
recognition policies, changes in sales volume of our services
have an immediate impact on our operating cash flow, while the
revenue impact is typically distributed across several periods.
In addition, operating expenses, other than cost of revenue, are
typically expensed in the period in which they occurred. We
therefore closely monitor operating cash flow as an indicator of
our performance in a given period and of our ability to fund
future growth. If there is an upturn or downturn in our
conversion rate of website visitors, average order size or
renewal rates — some of the other key business metrics
we track — then we would expect our operating cash
flow to rise or fall correspondingly. Our operating cash flow
was $7.7 million in 2003, $15.5 million in 2004 and
$30.6 million in 2005.
Deferred Revenue. Because customers pay us for
substantially all of our services in advance of our recognizing
the related revenue, we typically have a significant deferred
revenue balance on our balance sheet. As we provide services
during the term of a customer contract, the deferred revenue
balance associated with that contract decreases on a ratable
basis. Accordingly, deferred revenue provides a measure of
predictability to our future revenue and cost of revenue. Our
deferred revenue balance at December 31, 2005 was
$129.8 million, of which $89.1 million was considered
short-term because it would be recognized in 2006.
Conversion Rate. Domain name registrations are the
primary driver of our overall business. Accordingly, we closely
monitor our conversion rate, which we measure as the ratio of
domain names registered through our websites or our customer
care center to the number of visits to our websites during the
same period. This metric provides insight into the effectiveness
of our websites, from which we derive a majority of total
revenue. Because we can measure conversion rate on a real-time
basis, we can quickly identify positive and negative changes in
customer behavior on our websites and respond to those changes
in a timely manner.
Total Number of Orders and Average Order Size. A key
component of our business model is offering customers other
services in addition to our domain name registration services.
We closely monitor total number of orders and average order size
as indicators of the frequency with which website hosting and
other services are purchased together with our core domain name
registration services. We focus on total number of orders and
average order size by point of purchase, including our website,
customer care center and automatic billing, and by type of
customer, including new and repeat customers. We have found that
customers typically place multiple additional orders within the
first year of their initial purchases from us. Our total number
of orders across all points of purchase and for all customers
was approximately 2.9 million in 2003, approximately
5.1 million in 2004 and approximately 7.7 million in
2005 and our average order size was $20.14 in 2003, $21.23 in
2004 and $26.81 in 2005.
Renewal Rates. We closely monitor renewal rates for our
services and, in particular, the renewal rate for domain name
registration services, as these services comprise a majority of
total revenue. Many of our customers use our automatic renewal
option for their services. Our on-demand services are typically
purchased by customers who have purchased domain name
registration services from us. As a result, a change in the
renewal rate for expiring domain name registrations is often a
leading indicator of similar changes in revenue from our other
on-demand services. Our annual renewal rate for domain name
registrations was 61% in 2003, 62% in 2004 and 62% in 2005.
Sources of Revenue
We derive substantially all of our revenue from the sale of
domain name registration, website hosting and on-demand and
other services. A significant portion of total revenue comes
from customers purchasing bundled suites of multiple services.
As a result, we must allocate the total revenue recognized to
the different types of services that are bundled. Consequently,
revenue in each of the three categories below includes revenue
from the sale of stand-alone services as well as revenue
allocated from sales of bundled services. We sell our services
primarily through direct sales and, to a lesser extent, through
our network of resellers, which accounted for approximately 15%
of total revenue in 2005. No single customer accounted for more
than 5% of total revenue in 2003, 2004 or 2005.
Domain Name Registration. Domain name registration
revenue consists of domain name registrations, renewals and
transfers, domain name privacy, domain name application fees,
domain name back-orders and ICANN fee surcharges. We derived 60%
of total revenue in 2005 from the sale of domain name
registration services. Our domain name registration contracts
have a term of between one and ten years, although a majority of
our customers enter into contracts having a one-year term. We
currently sell our standard domain name registration services
for the .com TLD, together with basic advertising-supported
website hosting, free blog service and a single email account,
for $8.95 per year for a one-year term. We offer discounts
to purchasers of multiple domain names, multi-year contracts and
larger multi-service bundles. We defer domain name registration
revenue at the time of registration and recognize it on a daily
basis over the term of the contract.
We expect our domain name registration revenue to increase in
absolute dollars, but to continue to decrease as a percentage of
total revenue in the future.
Website Hosting. We generate website hosting revenue
through the sale of website hosting services. Customers most
frequently purchase website hosting on an annual basis, but it
is also available on a monthly basis or for longer periods. The
fees we charge for website hosting services differ based on the
type of hosting plan purchased and the amount of data storage,
bandwidth and other services included. Our current hosting plan
pricing starts at $3.99 per month for shared hosting,
$34.99 per month for virtual dedicated hosting, and
$88.99 per month for dedicated hosting. Website hosting
fees are generally paid up front, but we defer the associated
revenue and recognize it on a daily basis over the term of the
contract.
We expect our website hosting revenue to increase in absolute
dollars, but to fluctuate as a percentage of total revenue in
future periods, as we continue to add services and diversify our
revenue sources.
On-Demand Services and Other Revenue. Our on-demand
services currently include our online shopping cart, our website
building service, email accounts, our search engine optimization
service, our email marketing service, and our fax thru email
service. We generally sell our on-demand services either on an
annual or a monthly basis, depending on the service. We defer
revenue from on-demand services and recognize it on a daily
basis over the term of the contract.
Our other revenue sources include SSL certificates for secure
online transacting, domain name appraisal and auction services,
enrollment fees paid to us by our resellers and advertising on
“parked pages.” Parked pages are domain names
registered with us that do not yet contain an active website. We
recognize revenue from these services immediately upon
completion of the service, ratably over the term of the service
contract or, in the case of advertising, on a per-click basis.
We anticipate that our on-demand services and other revenue will
continue to increase in absolute dollars and as a percentage of
total revenue in future periods as we continue to sell
additional on-demand services to our customer base, to develop
and offer new services and to increase our advertising revenue
from parked pages.
Costs and Expenses
Cost of Revenue. Cost of revenue consists principally of
domain name registration fees paid by us to the TLD registries
and ICANN and, to a lesser extent, costs associated with
computer hosting equipment, data center expenses related to our
website hosting services, credit card fees, and payments made to
resellers. Cost of revenue does not include depreciation and
amortization expense. Our cost of revenue for domain name
registrations differs depending on the TLD. We currently pay
domain name registry fees of $6.00 per year for each .com,
..org and .us domain name registration, $4.25 per year for
each .net domain name registration, $5.30 per year for each
..biz domain name registration, and $5.75 per year for each
..info domain name registration. Approximately 73% of the domain
names we had under management as of April 30, 2006 were in
the .com TLD. We also pay a fee to ICANN of $0.25 per year for
each domain name registered in TLDs administered by ICANN.
Registry and ICANN fees represented approximately 82% of our
total cost of revenue in 2005. We pay these fees in full at the
time a customer registers a domain name through us. We
capitalize these fees, include them on our balance sheet as
prepaid domain name registry fees and amortize them to cost of
revenue over the term of the related contract. Excluding the
payment of registry and ICANN fees, our costs to maintain a
domain name registration are negligible.
We expect that as our domain name registration revenue increases
in absolute dollars in future periods, the dollar amount of our
cost of revenue will increase correspondingly. We expect that
our cost of revenue as a percentage of total revenue will be
adversely impacted if the U.S. Department of Commerce
approves the proposed agreement between ICANN and VeriSign
relating to the management of the .com TLD. This agreement would
allow VeriSign to increase the fee it charges registrars for
each .com domain registration by 7% annually in four of the six
years through 2012, and potentially beyond that date. We expect
that domain name registry fees relating to other TLDs, such as
the .net TLD, may also increase in future periods as a result of
the renewal of agreements with ICANN.
Our website hosting revenue and on-demand services and other
revenue generate substantially higher margins than our domain
name registration revenue and, as a result, our cost of revenue
as a percentage of total revenue depends on the mix of domain
name registration revenue and other types of revenue. We expect
our cost of revenue as a percentage of total revenue to decrease
in the future as on-demand services and other revenue becomes a
greater percentage of total revenue.
Research and Development. Research and development
expenses consist primarily of salaries and related expenses for
personnel developing new services and maintaining and enhancing
our existing services. We expect research and development
expenses to increase in absolute dollars in the future as we
continue to invest additional resources to develop new services
and enhance our existing services.
Marketing and Advertising. Marketing and advertising
expenses consist primarily of online and offline advertising
costs and marketing personnel salaries and related expenses. In
2003 and 2004, advertising expenses primarily related to online
search engine advertising. In 2005, advertising expenses
consisted of both online and offline advertising, including a
commercial in the 2005 Super Bowl and subsequent cable
television advertising. We expect marketing and advertising
expenses to fluctuate both in absolute dollars and as a
percentage of total revenue in the future depending on the size
and scope of our future marketing and advertising campaigns. As
a result of the expenses we incurred in connection with our 2006
Super Bowl advertising campaign, we expect marketing and
advertising expenses to be higher in 2006 than in 2005. Should
we choose to run television advertisements in connection with
future Super Bowls, we expect our marketing and advertising
expenses to increase significantly in the first quarter of
future years on a sequential quarterly basis, consistent with a
similar increase we experienced from the fourth quarter of 2004
to the first quarter of 2005.
Selling, General and Administrative. Selling, general and
administrative expenses consist primarily of salaries and
related expenses for personnel performing customer care and
support, executive, accounting, legal and information technology
functions, professional fees, rent expense, internal-use
software licenses, overhead and other corporate expenses. We
expect selling, general and administrative expenses to increase
in absolute dollars in the future as a result of further
investments in our customer care center, increased salary and
related expenses associated with increased headcount in our
finance and legal departments, increased executive- and
director-level compensation, and higher professional fees and
expenses associated with being a public reporting company.
Depreciation and Amortization. Depreciation and
amortization expenses consist of charges relating to the
depreciation and amortization of all of the property and
equipment used in our business. We expect depreciation and
amortization expenses to increase in absolute dollars in future
periods as a result of our purchase of a new data center
facility in 2005, and as we continue to make capital investments
in hardware and other equipment, particularly in support of the
further expansion of our website hosting services.
Share-Based Compensation. Our historical operating
expenses have not included share-based compensation expenses
related to options issued to employees, since no outstanding
stock options are exercisable prior to our initial public
offering or a change of control of our company. All outstanding
vested stock options will become exercisable following this
offering and we expect to record a charge relating to
share-based compensation in the quarter in which this offering
is closed, and to record charges thereafter based on the vesting
of stock options in the periods after this offering. This
compensation will be allocated among research and development
expenses, marketing and advertising expenses, and selling,
general and administrative expenses based on the job function of
the holders of the outstanding options.
The following table presents our selected consolidated statement
of operations data expressed as a percentage of total revenue
for the periods indicated:
Total revenue increased 86% from $39.3 million in 2003 to
$73.0 million in 2004 and an additional 92% to
$139.8 million in 2005. Our number of customers under
contract increased from approximately 1.0 million as of
December 31, 2003 to approximately 1.5 million as of
December 31, 2004, and to approximately 2.4 million as
of December 31, 2005. Our average order size across all
points of purchase and for all customers increased from $20.14
in 2003 to $21.23 in 2004 and to $26.81 in 2005.
Domain Name Registration. Domain name registration
revenue increased 79% from $26.8 million in 2003 to
$48.0 million in 2004 and an additional 76% to
$84.5 million in 2005. Domain name registration revenue
declined from 68% of total revenue in 2003, to 66% of total
revenue in 2004 and 60% of total revenue in 2005.
The increase in domain name registration revenue from 2003 to
2005 in absolute dollars was attributable primarily to increases
in new domain name registrations that resulted from higher
traffic volume to our websites and to increased rates of
conversion of that traffic into domain name registration
customers. This increase in traffic levels was due to overall
industry growth and to increased consumer awareness of our
brand. The decrease in domain name registration revenue as a
percentage of total revenue from 2003 to 2005 was primarily due
to more rapid growth in on-demand services and other revenue.
Website Hosting.Website hosting revenue increased 74%
from $8.6 million in 2003 to $14.9 million in 2004 and
an additional 105% to $30.6 million in 2005. Website
hosting revenue comprised 22% of total revenue in 2003, 20% of
total revenue in 2004, and 22% of total revenue in 2005.
The increase in website hosting revenue from 2003 to 2005 in
absolute dollars was attributable primarily to an increased
volume of sales of website hosting services, including sales of
website hosting services as part of our bundled service
offerings, consistent with a corresponding overall increase in
new domain name registration customers. To a lesser extent, this
increase in website hosting revenue was due to an increase in
the number of customers renewing website hosting services
initially purchased in prior periods. In addition, a portion of
the increase from 2004 to 2005 was attributable to our
introduction of dedicated website hosting and virtual dedicated
website hosting services during 2005.
On-Demand Services and Other Revenue. On-demand services
and other revenue increased 156% from $3.9 million in 2003
to $10.0 million in 2004 and an additional 146% to
$24.7 million in 2005. On-demand services and other revenue
represented an increasing percentage of total revenue, growing
from 10% of total revenue in 2003, to 14% of total revenue in
2004, and 18% of total revenue in 2005. The increase in
on-demand services and other revenue as a percentage of total
revenue from 2003 to 2005 was due primarily to more rapid growth
in on-demand services and other revenue than in our other
primary sources of revenue.
The increase in on-demand services and other revenue from 2003
to 2005 in absolute dollars was attributable primarily to an
increase in new customers purchasing domain name registrations
and website hosting services from us who also purchased
on-demand and other services. This increase was also due to the
increasing purchase of additional services by existing customers.
The increase in on-demand services and other revenue from 2003
to 2004 in absolute dollars was also due to a number of other
factors, including revenue from the introduction in 2004 of SSL
certificates, Online File Folder, Express Email Marketing, Quick
Shopping Cart, and Fax Thru Email, and a full year of revenue
from services introduced in 2003, including Traffic Blazer and
Website Tonight.
The increase in on-demand services and other revenue from 2004
to 2005 in absolute dollars was also due to a full year of
revenue from services we introduced in 2004, sales of new
services we introduced in 2005, such as domain name auctions,
and our initiation of the delivery of third-party advertisements
on “parked pages.”
Operating Expenses
Cost of Revenue
Year Ended December 31,
% Change
2003
2004
2005
2003 vs. 2004
2004 vs. 2005
(In thousands)
Cost of revenue
$
19,855
$
38,596
$
70,540
94
%
83
%
Cost of revenue increased 94% from $19.9 million in 2003 to
$38.6 million in 2004 and an additional 83% to
$70.5 million in 2005. Cost of revenue comprised 50% of
total revenue in 2003, 53% of total revenue in 2004 and 50% of
total revenue in 2005.
The increase in cost of revenue from 2003 to 2005 in absolute
dollars was due primarily to a $41.8 million increase in
fees paid to registries and ICANN as a result of increases in
the volume of domain name registrations sold and renewed. To a
lesser extent, this increase was due to a $3.9 million
increase in payment card fees resulting from the increase in
overall sales volume, a $2.4 million increase in data center
expenses associated with the overall increase in website hosting
sales volume, and a $2.1 million increase in amounts paid
to resellers resulting from increased reseller sales volume. The
increase from 2003 to 2004 in cost of revenue as a percentage of
total revenue was due primarily to changes in our domain name
registration pricing in 2004. The decrease in cost of revenue as
a percentage of total revenue from 2004 to 2005 was due
primarily to more rapid growth in on-demand services and other
revenue, which has substantially higher margins than our other
sources of revenue.
Research and Development Expenses
Year Ended December 31,
% Change
2003
2004
2005
2003 vs. 2004
2004 vs. 2005
(In thousands)
Research and development
$
3,513
$
5,348
$
9,705
52
%
81
%
Research and development expenses increased 52% from
$3.5 million in 2003 to $5.3 million in 2004 and an
additional 81% to $9.7 million in 2005. Research and
development expenses comprised 9% of total revenue in 2003, 7%
of total revenue in 2004 and 7% of total revenue in 2005.
The increase in research and development expenses from 2003 to
2005 in absolute dollars was attributable primarily to an
increase in employee headcount from 50 employees as of
December 31, 2003 to 106 employees as of December 31,2005 and related costs.
Marketing and Advertising Expenses
Year Ended December 31,
% Change
2003
2004
2005
2003 vs. 2004
2004 vs. 2005
(In thousands)
Marketing and advertising
$
1,196
$
4,298
$
15,239
259
%
255
%
Marketing and advertising expenses increased 259% from
$1.2 million in 2003 to $4.3 million in 2004 and an
additional 255% to $15.2 million in 2005. Marketing and
advertising expenses comprised approximately 3% of total revenue
in 2003, 6% of total revenue in 2004 and 11% of total revenue in
2005.
The increase in marketing and advertising expenses from 2003 to
2004 in absolute dollars was due primarily to increased spending
on online advertisements, including keywords purchased on major
search engines, email marketing and email and branded display
advertising.
The increase in marketing and advertising expenses from 2004 to
2005 in absolute dollars was due primarily to a
$7.3 million increase in spending on offline advertising
campaigns in 2005 including television, radio and print
advertising, with a majority of this amount related to our
television advertising campaign for the 2005 Super Bowl. To a
lesser extent, this increase in marketing and advertising
expenses was attributable to an increase in spending on online
advertisements, primarily comprised of keywords purchased on
major search engines, and to increased marketing headcount and
related costs.
Selling, General and Administrative Expenses
Year Ended December 31,
% Change
2003
2004
2005
2003 vs. 2004
2004 vs. 2005
(In thousands)
Selling, general and administrative
$
14,162
$
25,743
$
50,373
82
%
96
%
Selling, general and administrative expenses increased 82% from
$14.2 million in 2003 to $25.7 million in 2004 and an
additional 96% to $50.4 million in 2005. Selling, general
and administrative expenses comprised 36% of total revenue in
2003, 35% of total revenue in 2004 and 36% of total revenue in
2005.
The increase in selling, general and administrative expenses in
absolute dollars from 2003 to 2004 was attributable primarily to
an increase in salaries and related expenses for newly hired
personnel in our customer care center. To a lesser extent, this
increase was due to increased insurance and internal
telecommunications costs as a result of our overall growth.
The increase in selling, general and administrative expenses
from 2004 to 2005 in absolute dollars was due primarily to an
increase in salaries and related expenses for newly hired
personnel in our customer care center and other areas of our
business. To a lesser extent, this increase was due to increased
rental expense associated with two new facilities and expansions
of our two other facilities, and increased professional fees
associated with audits for payment card industry compliance, SSL
certification compliance and information technology compliance
conducted in preparation for becoming a public reporting company.
Depreciation and Amortization Expenses
Year Ended December 31,
% Change
2003
2004
2005
2003 vs. 2004
2004 vs. 2005
(In thousands)
Depreciation and amortization
$
1,384
$
2,780
$
7,784
101
%
180
%
Depreciation and amortization expenses increased 101% from
$1.4 million in 2003 to $2.8 million in 2004 and an
additional 180% to $7.8 million in 2005. Depreciation and
amortization expenses represented 4% of total revenue in 2003,
4% of total revenue in 2004 and 6% of total revenue in 2005.
The increase in depreciation and amortization expenses from 2003
to 2004 in absolute dollars was due primarily to
$7.3 million in additional spending on computer hardware
necessary to accommodate the overall growth in our business. To
a lesser extent, the increase was due to the cost of
infrastructure associated with the opening of one additional
facility, the implementation of a new internal
telecommunications system, and the placement into service of an
SSL root certificate that was purchased in 2003 which enabled us
to begin the sale of SSL certificates during 2004.
The increase in depreciation and amortization expenses from 2004
to 2005 in absolute dollars was due primarily to
$19.5 million in additional spending on computer hardware
necessary to accommodate the overall growth in our business.
These purchases included additional computer servers required by
growth in our sales of website hosting services, additional
hardware in anticipation of increased traffic levels on our
website resulting from our 2005 Super Bowl television
advertising campaign, and additional hardware associated with
our achieving compliance with new industry requirements for
accepting credit cards.
Interest Income (Expense) and Other Income, Net
Interest income (expense) and other income, net was $54,000 in
2003, compared with $112,000 in 2004 and $2.3 million in
2005. Interest income (expense) and other income, net in 2005
was comprised primarily of $2.0 million received by us in
settlement of a legal dispute involving breach of contract by a
third party.
The following tables set forth selected unaudited quarterly
consolidated statement of operations data for the eight fiscal
quarters in 2004 and 2005, as well as the percentage that each
line item represents of total revenue. The information for each
of these quarters has been prepared on the same basis as the
audited consolidated financial statements included elsewhere in
this prospectus and, in the opinion of management, includes all
adjustments necessary for the fair presentation of the results
of operations for these periods. This data should be read in
conjunction with the audited consolidated financial statements
and related notes included elsewhere in this prospectus. These
quarterly operating results are not necessarily indicative of
our operating results for any future period.
Excluding depreciation and amortization, which is shown
separately.
Total revenue increased sequentially in each quarter presented.
These increases were due primarily to increases in number of
customers and sales of new service offerings. Our domain name
registration revenue was flat from the third quarter to the
fourth quarter in 2004 primarily due to slowing sales during the
holiday season. We typically experience a decrease in domain
name registrations from the end of November through the end of
December compared with the rate of sales earlier in the fourth
quarter. Historically, we have experienced a significant
increase in revenue from the fourth quarter of one year to the
first quarter of the next year. We believe this is largely
attributable to the increase in consumer purchases of new
personal computers during the holiday season in the fourth
quarter of each year and a resulting desire to establish an
online presence. In the first quarter of 2005, total revenue
increased by 20% from the fourth quarter of 2004. This increase
and the larger than usual increases in total revenue during the
second and third quarters of 2005 were due to a significant
increase in overall traffic levels on our website following our
2005 Super Bowl advertising campaign and its related publicity.
The 274% increase in marketing and advertising expenses from the
fourth quarter of 2004 to the first quarter of 2005 reflected
increased spending by us on television advertising during the
2005 Super Bowl, related online advertising and the launch of
our offline national advertising campaign. The continuation of
our offline national marketing campaign resulted in marketing
and advertising expenses in the remaining quarters of 2005 being
significantly higher than marketing and advertising expenses in
the comparable quarters of 2004.
Liquidity and Capital Resources
Since our inception, we have funded our operations and met our
capital expenditure requirements primarily from cash flows from
operations. During 2005, we also entered into financing
arrangements in connection with the purchase of a building. We
had cash, cash equivalents and short-term investments of
$13.6 million as of December 31, 2005, and
$8.8 million as of December 31, 2004. In addition, as
of December 31, 2005, we had $2.3 million in accounts
receivable and $5.3 million in registry deposits, compared
with $0.8 million in accounts receivable and
$2.2 million in registry deposits as of December 31,2004. Our accounts receivable consist primarily of amounts due
from our credit card processor related to float
from recently completed credit card transactions. Registry
deposits consist of required deposits we pay to various domain
name registries. These deposits fund the registry fees we must
pay as a result of ongoing sales of domain name registrations to
our customers.
Operating Activities. Our financial focus is on
sustaining and increasing growth in operating cash flow. Net
cash provided by operating activities increased 102% from
$7.7 million in 2003 to $15.5 million in 2004 and an
additional 98% to $30.6 million in 2005, despite an
increase in net loss each year. This is primarily due to the
fact that we are paid up-front for substantially all of our
services, although we typically defer revenue and cost of
revenue and recognize these balances over the term of the
service provided. Meanwhile, as sales have increased, we have
incurred increasing operating expenses, which, other than cost
of revenue, are typically recognized as incurred. Therefore, as
we have increased sales each year from 2003 to 2005, the growth
in our deferred revenue has increased each year, from an
increase of $18.6 million in 2003, to an increase of
$33.9 million in 2004 and an increase of $58.6 million
in 2005, in each case offset by increasing growth in prepaid
domain name registry fees, from an increase of
$11.3 million in 2003, to an increase of $16.8 million
in 2004 and an increase of $23.0 million in 2005. The
growth in net loss over this period has also been partially
mitigated by growth in depreciation and amortization from
$1.4 million in 2003, to $2.8 million in 2004 and
$7.8 million in 2005.
Investing Activities. Net cash used in investing
activities increased 48% from $5.4 million in 2003 to
$8.0 million in 2004 and an additional 251% to
$28.0 million in 2005. The increase from 2003 to 2004 was
due primarily to capital expenditures related to our overall
growth and purchases of securities available for sale. The
increase from 2004 to 2005 was due primarily to an increase in
purchases of property and equipment from $5.9 million in
2004 to $28.1 million in 2005. The increase in property and
equipment expenditures from 2004 to 2005 was due primarily to
the purchase of a building for $9.5 million, our efforts to
build redundancy and additional storage capacity in our systems
and software applications, the purchase of infrastructure
associated with our compliance with payment card industry
requirements, and the purchase of additional hardware and
general computer equipment requirements to support our growth.
Financing Activities. Net cash provided by (used in)
financing activities was $(0.6) million in 2003,
$(5.1) million in 2004 and $2.2 million in 2005. We
made distributions to our sole stockholder of $0.6 million
in 2003, $5.1 million in 2004 and $4.8 million in
2005. In 2005, we obtained a $7.1 million loan from a bank
to finance the purchase of a building.
Future Needs. We believe the net proceeds we will receive
from this offering, together with our existing cash, cash
equivalents and short-term investments and any operating cash
flow, will be sufficient to meet our projected operating and
capital expenditure requirements for at least the next
12 months. However, our ability to generate cash is subject
to our performance, general economic conditions, industry trends
and other factors. To the extent that funds from this offering,
together with existing cash, cash equivalents and short-term
investments, are insufficient to fund our future activities, we
may need to raise additional funds through public or private
equity or debt financing. If additional funds are obtained by
issuing equity securities, substantial dilution to existing
stockholders may result. We may be unable to secure additional
funds on terms favorable to us or at all.
Indebtedness. In October 2005, we obtained a
$7.1 million loan from U.S. Bank to finance the
purchase of a building that we intend to use as a data center.
The loan bears interest at a rate of 2.10% plus one-month LIBOR.
We have entered into an interest rate swap in order to fix this
rate at 6.98%. In October 2005, we also entered into a
$1.5 million credit facility with U.S. Bank for the
purchase of data center equipment. Any borrowing under the
credit facility would bear interest at the prime rate announced
by U.S. Bank until July 31, 2006 and, thereafter at
the rate of 2.10% plus one-month LIBOR. As of December 31,2005, there were no balances outstanding under this facility. We
have received a waiver from the bank for failure to comply with
the requirement that we deliver financial statements audited by
a certified public accountant within 120 days after our
fiscal year end. All other covenants have been satisfied to
date. We anticipate repaying all outstanding indebtedness to
U.S. Bank with a portion of the proceeds of this offering.
Interest expense in 2005 was approximately $0.2 million.
As of December 31, 2004 and 2005, we did not have any
relationships with unconsolidated entities or financial
partnerships, such as entities often referred to as structured
finance or special purpose entities, which would have been
established for the purpose of facilitating off-balance sheet
arrangements or other contractually narrow or limited purposes.
Contractual Obligations and Commitments
The following table presents a summary of our contractual
obligations and commitments as of December 31, 2005.
Payments Due by Period
Less than
More than
Total
1 Year
1-3 Years
3-5 Years
5 Years
(In thousands)
Operating lease obligations
$
10,551
$
4,002
$
5,013
$
1,514
$
22
Long-term debt obligations*
9,330
610
1,261
7,459
—
Other contractual commitments
2,473
1,132
1,341
—
—
* Includes $7.0 million of aggregate principal
payments plus interest.
Operating lease obligations consisted of obligations under
leases for office space and hardware maintenance agreements.
Long-term debt obligations consisted of indebtedness to
U.S. Bank in connection with our purchase of a new data
center facility. Other contractual commitments consisted of
payments due under equipment maintenance agreements. We intend
to use a portion of the proceeds from this offering to repay in
full all outstanding long-term debt and accrued interest. The
expected timing of payments included in this table is estimated
based on current information. Timing of payments and actual
amounts paid may be different depending on the timing of
receipts of goods or services and changes to agreed upon amounts.
Critical Accounting Policies and Estimates
Our discussion and analysis of our financial condition and
results of operations are based upon our consolidated financial
statements, which have been prepared in accordance with
accounting principles generally accepted in the United States.
The preparation of these financial statements requires us to
make estimates and judgments that affect the reported amounts of
assets, liabilities, revenue, costs and expenses, and related
disclosures. We evaluate our estimates and assumptions on an
ongoing basis. Our estimates are based on historical experience
and various other assumptions that we believe to be reasonable
under the circumstances. Our significant accounting policies
that require significant estimates and judgments, which we call
our critical accounting policies, are as follows:
Revenue Recognition. We recognize revenue in accordance
with applicable revenue recognition guidance and
interpretations, including the requirements of Emerging Issues
Task Force Issue
No. 00-21,
Revenue Arrangements with Multiple Deliverables,
Statement of Position 97-2, Software Revenue Recognition,
and SEC Staff Accounting Bulletin No. 104,
Revenue Recognition.
We record revenue when all four of the following criteria are
met: (1) there is persuasive evidence that an arrangement
exists; (2) delivery of the services has occurred;
(3) the selling price is fixed or determinable, and
(4) collectibility is reasonably assured. We record cash
received in advance of revenue recognition as deferred revenue.
We defer domain name registration revenue at the time of
registration and recognize it ratably on a daily basis over the
term of the registration. Domain name registration contracts we
enter into with our customers have a term ranging from one to
ten years. Except for arrangements we have with a small number
of customers which are large enterprises with which we have
negotiated alternative arrangements, all of our customers pay
for domain name registrations in full at the time of
registration. Domain name registration fees are non-refundable,
and we record them as deferred revenue in our consolidated
balance sheets. We record
website hosting revenue and on-demand services revenue as
deferred revenue and recognize it ratably on a daily basis as
the services are provided.
Our agreements do not contain general rights of return. We
reserve for payment card chargebacks and certain other refunds
based on our historical experience. We record reserves as a
reduction to revenue.
We evaluate revenue arrangements with multiple deliverables,
including the sale of our bundled suites of multiple services,
to determine if the deliverable items can be divided into more
than one unit of accounting. An item can generally be considered
a separate unit of accounting if all of the following criteria
are met:
•
the delivered item has value to the customer on a stand-alone
basis;
•
there is objective and reliable evidence of the fair value of
the undelivered item; and
•
if the arrangement includes a general right of return relative
to the delivered item, delivery or performance of the
undelivered item is considered probable and substantially in our
control.
Items that do not meet these criteria are combined into a single
unit of accounting. If there is objective and reliable evidence
of fair value for all units of accounting, we allocate the
arrangement consideration to the separate units of accounting
based on their relative fair values. We record revenue from
these units in the appropriate revenue line item. In cases where
the selling price allocated to an individual unit is less than
our cost of the unit, we immediately record a loss for the
amount by which the cost exceeds the revenue allocated to the
unit. In the event objective and reliable evidence of the fair
value(s) of the undelivered item(s) did not exist, we would
defer all revenue for the arrangement and recognize it over the
period in which the last item is delivered.
Taxes. As a subchapter S corporation for all periods
from inception through December 31, 2005, we were not
subject to federal income taxes directly. Rather, our
stockholder was subject to federal income taxation based on our
net taxable income or loss. Upon our reincorporation in Delaware
as a subchapter C corporation, we will need to make estimates
and judgments in determining our income tax expense, and in the
calculation of our tax assets and liabilities. This approach
will require the recognition of deferred tax assets and
liabilities for the expected future tax consequences of
temporary differences between the financial statement carrying
amounts and the tax bases of assets and liabilities. We will
record a valuation allowance to reduce our deferred tax assets
to the amount that is more likely than not to be realized.
Judgment will be required to determine whether an increase or
decrease of the valuation allowance is warranted. We have had
substantial tax losses over the years and a net loss in every
year since inception. Therefore, we expect to record a full
valuation allowance against our tax assets.
Our corporate tax rate will be a combination of the tax rates of
the jurisdictions where we conduct business. We are an
Arizona-based company and do not currently have operations in
foreign jurisdictions.
We are responsible for charging end customers certain taxes in
numerous international jurisdictions. In the ordinary course of
business, there are many transactions and calculations where the
ultimate tax determination is uncertain. In the future, we may
come under audit, which could result in changes to our tax
estimates. We believe that we maintain adequate tax reserves to
offset the potential liabilities that may arise upon audit.
Although we believe our tax estimates and associated reserves
are reasonable, the final determination of tax audits and any
related litigation could be materially different than the
amounts reserved for tax contingencies. To the extent that these
estimates ultimately prove to be inaccurate, the associated
reserves would be adjusted resulting in our recording a benefit
or expense in the period in which a final determination is made.
Share-Based Compensation
We account for employee stock options granted prior to
December 31, 2005 pursuant to Accounting Principles Board
Opinion No. 25, Accounting for Stock Issued to
Employees, or APB 25, and related interpretations, and
have adopted the disclosure-only alternative of Statement of
Financial Accounting Standards, or SFAS, No. 123,
Accounting for Stock-Based Compensation, and SFAS,
No. 148, Accounting for Stock Based
Compensation — Transition and Disclosures. Stock
options granted prior to December 31, 2005
have exercise prices equal to the value of the underlying stock
as determined by our board of directors on the date the option
was granted. Our board of directors determined the value of the
underlying stock by considering a number of factors, including
operating cash flows, the risks we faced at the time, and the
lack of liquidity of our common stock. The stock options vest
25% per year beginning one year after the grant date, and
expire ten years from the date of grant; however, the options
are not exercisable prior to the sale of our company or our
common stock being listed and publicly traded on a U.S. stock
exchange. As a result of the lack of exercisability, the stock
options outstanding are considered to be variable awards and the
measurement date will only occur when exercise of the options
becomes probable. At December 31, 2005, the exercisability
of our stock options had not yet been deemed probable and as a
result no compensation expense has been recorded. We will record
a compensation expense in connection with these grants
concurrently with the effective date of this offering. This
compensation expense will be allocated among research and
development expenses, marketing and advertising expenses, and
selling, general and administrative expenses based on the job
function of the holders of the outstanding options.
Based on the fair value of our common stock of $11.64 at
December 31, 2005, the amount of unrecognized compensation
expense resulting from outstanding stock options would be
approximately $61.6 million. In addition, the amount of
unrecognized compensation expense related to vested options at
December 31, 2005 would be approximately
$56.5 million. This fair value is based upon a
retrospective third-party valuation analysis and is inherently
uncertain and highly subjective.
As of January 1, 2006, we have adopted
SFAS No. 123R. SFAS No. 123R requires
measurement of all employee share-based compensation awards
using a fair-value method and recording of this expense in the
consolidated financial statements. We selected the
Black-Scholes-Merton option pricing model as the most
appropriate method for estimating the fair value of share-based
awards. The Black-Scholes-Merton option pricing model requires
us to make certain assumptions, including stock price
volatility, estimated forfeitures, employee stock option
exercise behavior and other factors, that can be highly
subjective and difficult to predict. A change in one or more of
these assumptions could have a material impact on total
share-based compensation expense. SFAS No. 123R
requires share-based compensation expense to be recognized in
our statement of operations over the service period of the
share-based award, which is typically the vesting period. We are
required to adopt SFAS No. 123R under the prospective
method, in which nonpublic entities that previously applied SFAS
No. 123 using the minimum-value method (whether for
financial statement recognition or pro forma disclosure
purposes), would continue to account for unvested stock options
outstanding at the date of adoption of SFAS No. 123R in the
same manner as they had been accounted for prior SFAS
No. 123R to adoption. That is, since we have been
accounting for stock options using the intrinsic-value method
under APB 25, we will continue to apply APB 25 in
future periods to stock options outstanding at January 1,2006.
Contingencies. We record contingent liabilities resulting
from asserted and unasserted claims against us, when it is
probable that a liability has been incurred and the amount of
the loss is reasonably estimable. We disclose contingent
liabilities, when there is a reasonable possibility that the
ultimate loss will exceed the recorded liability. Estimating
probable losses requires analysis of multiple factors, in some
cases including judgments about the potential actions of
third-party claimants and courts. Therefore, actual losses in
any future period are inherently uncertain. We currently are
involved in legal proceedings in the normal course of business.
We do not believe these proceedings will have a material adverse
effect on our consolidated results of operations or financial
position.
Quantitative and Qualitative Disclosures about Market Risk
Our investment portfolio, consisting of fixed income securities,
was $3.0 million as of December 31, 2005. These
securities, like all fixed income instruments, are subject to
interest rate risk and will decline in value if market interest
rates increase. If market rates were to increase immediately and
uniformly by 10% from the levels of December 31, 2005, the
decline in the fair value of our investment portfolio would not
be material given that our investments typically have interest
rate reset features that regularly adjust to current market
rates. Additionally, we have the ability to hold our fixed
income investments until maturity and, therefore, we would not
expect to recognize any material adverse impact in income or
cash flows.
We are exposed to financial market risks, including changes in
interest rates and foreign currency in connection with our
foreign customers’ exposure to fluctuations in exchange
rates. Nevertheless, the fair value of our investment portfolio
or related income would not be significantly impacted by a
100 basis point increase or decrease in interest rates, due
primarily to the short-term nature of the major portion of our
investment portfolio.
We do not purchase or hold any derivative financial instruments
for the purpose of speculation or arbitrage.
At present, we have $7.0 million in debt obligations.
Changes in interest rates do not affect interest expense
incurred on our long-term debt as we have fixed the interest
rate using an interest rate swap. At present, we have no
borrowings under our line of credit facility.
We have no operations outside of the United States and,
accordingly, we are not susceptible to significant risk from
changes in foreign currencies.
During the normal course of business we could be subjected to a
variety of market risks, as we discussed above. We continuously
assess these risks and have established policies and procedures
to protect against the adverse effects of these and other
potential exposures. Although we do not anticipate any material
losses in these risk areas, no assurance can be made that
material losses will not be incurred in these areas in the
future.
Recent Accounting Pronouncements
In March 2005, the SEC issued Staff Accounting Bulletin, or SAB,
No. 107,
Share-Based
Payment. SAB No. 107 provides guidance regarding
the interaction between SFAS. No. 123R and certain SEC rules and
regulations, including guidance related to valuation methods,
the classification of compensation expense,
non-GAAP financial
measures, the accounting for income tax effects of
share-based payment
arrangements, disclosures in management’s discussion and
analysis of financial condition and results of operations
subsequent to adoption of SFAS No. 123R and
modification of options prior to the adoption of
SFAS No. 123R.
In May 2005, the Financial Accounting Standards Board, or FASB,
issued SFAS No. 154, Accounting Changes and Error
Corrections — A Replacement of APB Opinion No. 20
and FASB Statement No. 3. SFAS No. 154
requires the retrospective application to prior periods’
financial statements of changes in accounting principle, unless
it is impractical to determine either the period-specific
effects or cumulative effect of the accounting change.
SFAS No. 154 also requires that a change in
depreciation, amortization or depletion method for long-lived
non-financial assets be accounted for as a change in accounting
estimate affected by a change in accounting principle.
SFAS No. 154 is affective for accounting changes and
corrections of errors made in fiscal years beginning after
December 15, 2005 and we will adopt this provision, as
applicable, during 2006.
In November 2005, the FASB issued FSP FAS 115-1 and
FAS 124-1, The Meaning of Other-Than-Temporary
Impairment and Its Application to Certain Investments, which
provides guidance on determining when investments in certain
debt and equity securities are considered impaired, whether that
impairment is other-than-temporary, and on measuring such
impairment loss. FSP 115-1 also includes accounting
considerations subsequent to the recognition of other-than
temporary impairment and requires certain disclosures about
unrealized losses that have not been recognized as
other-than-temporary impairments.
FSP 115-1 is
required to be applied to reporting periods beginning after
December 15, 2005 and is required to be adopted by us in
the first quarter of fiscal 2006. We are currently evaluating
the effect that the adoption of FSP 115-1 will have on our
consolidated results of operations and financial condition but
does not expect it to have a material impact.
Go Daddy is a leading provider of services that enable
individuals and businesses to establish, maintain and evolve an
online presence. We provide a variety of domain name
registration and website hosting services as well as a broad
array of on-demand and other services such as website creation
tools, ecommerce and security solutions and productivity and
marketing tools. We are the world’s largest domain name
registrar, with approximately 13.6 million domain names
under management as of April 30, 2006, and North
America’s largest shared website hosting provider. During
the final six months of 2005, we registered approximately
one-third of all domain
names registered in the top five gTLDs — .com, .net,
..org, .biz and .info. Our domain name registration services act
as a gateway product for our other services which include
website hosting and creation tools, ecommerce and security
solutions and productivity and marketing tools. Our services can
be purchased independently or as bundled suites of offerings
targeted to meet the specific needs of our customers, and we
market these services both at the initial point of purchase as
well as throughout the customer lifecycle. We have developed
substantially all of our service offerings internally and
believe our suite of services is
best-of-breed in the
industry in terms of comprehensiveness, performance,
functionality and ease of use. We seek to strengthen customer
relationships by providing what we believe are the highest
levels of customer care and support in the industry. We generate
revenue from sales made directly to customers through our
primary website, www.GoDaddy.com, and our customer care
center, as well as indirectly through our large network of
resellers.
Industry Overview
The Growth of the Internet
The Internet is a global medium for information, communication
and commerce and an integral part of everyday life for hundreds
of millions of people worldwide. According to Euromonitor
International, an industry research firm, the number of Internet
users worldwide was an estimated 1.2 billion in 2005 and is
estimated to grow to approximately 2.2 billion in 2010,
representing an annual growth rate of approximately 13%. Due to
a number of factors, including the rapid rate of adoption of
broadband services, these Internet users are also spending more
time online. According to the U.S. Census Bureau, the
average amount of time spent online by a person in the U.S.
nearly doubled between 2000 and 2005. This growth in Internet
users and usage is being driven by the ever-increasing variety
of content, commerce and applications available online. Many
individuals now use the Internet as a primary means to access
news and information, communicate and socialize, and purchase
goods and services.
The global reach, interactive nature and transactional
efficiency of the Internet enable businesses to capitalize on
new revenue opportunities by building websites that support
ecommerce and other commercial activities. While most large
corporations are already operating online, many small and
home-based businesses have yet to establish a presence online.
According to IDC, a leading research firm for information
technology markets, there were 8.1 million businesses in
the U.S. with fewer than 100 employees in 2005, of which
only 4.8 million, or less than 60%, had a website.
Additionally, IDC estimates that there were 14.7 million
home-based businesses in 2005, of which less than 30% had a
website. Even smaller percentages of these small and home-based
businesses actually use their websites to communicate or
transact business with their customers online.
The growth in Internet users and usage provides many
opportunities to individuals and businesses that establish and
maintain an online presence, or an electronic
“address” on the Internet. In order to take advantage
of these opportunities, individuals and businesses must first
register a domain name, and then create and maintain a website.
Services integral to building and maintaining a meaningful
online presence include website creation and development,
website hosting, email, ecommerce and online security.
Registering a domain name is the first step in establishing an
online presence. A domain name, such as GoDaddy.com, represents
a unique Internet Protocol, or IP, address that serves as an
identifier for a computer or device on the Internet.
Substantially all domain names include the domain suffix of
either a generic top level domain, or gTLD, or a country code
top level domain, or ccTLD. gTLDs include domain suffixes such
as .com, .net and .org, while ccTLDs include domain suffixes
such as .us, .ca and .de. As the Internet continues to evolve,
the universe of TLDs continues to expand. For example, the .eu
suffix was introduced in early 2006 to denote domain names
associated with the European Union. According to Zooknic, an
Internet research firm, as of December 31, 2005, there were
approximately 94 million registered domain names worldwide,
and this number is expected to increase to approximately
240 million in 2010, representing an annual growth rate of
21%.
The domain name registration system consists of two principal
types of entities — registries and
registrars — both of which are overseen by the
Internet Corporation for Assigned Names and Numbers, or ICANN, a
non-profit corporation established by the U.S. Department
of Commerce to manage the domain name registration system. ICANN
contracts with registry companies, such as VeriSign and NeuStar,
Inc., to administer the master databases of domain names and
their corresponding IP addresses for one or more TLDs. ICANN
accredits registrar companies, such as Go Daddy, to facilitate
registration of domain names with the relevant registry.
Customers typically purchase from registrars the right to
utilize specific domain names for periods of one to ten years,
with full payment due at the time of purchase. Registrars, in
turn, pay fees to the relevant registry, as well as to ICANN for
the TLDs administered by ICANN, for each domain name registered,
and then handle ongoing billing, customer service and technical
management related to the domain name.
Building and Maintaining an Online
Presence
After registering a domain name, an individual or a business
seeking to create an online presence may use a variety of
products or services such as the following:
Website hosting. A website’s content is composed of
data that must be hosted on a server that can be accessed by
Internet users. Hosting refers to the housing, serving and
maintaining of data for one or more websites on servers that are
operated and maintained by the website owner or a third-party
hosting provider. In addition to basic website storage and
electronic access, many website hosting service providers offer
their customers additional benefits, including increased
connectivity speed and bandwidth, redundancy, backup, security
and technical support. According to IDC, total shared and basic
dedicated website hosting services revenue in the U.S. was
approximately $1.8 billion in 2005 and is expected to grow
to $3.4 billion in 2009, representing an annual growth rate
of 17%.
Ecommerce services. The increase in Internet users and
usage is causing rapid growth in ecommerce volume. Many
consumers and businesses use the Internet as a convenient
resource for researching and purchasing goods and services.
According to IDC, global ecommerce is expected to grow from $3.8
trillion in 2005 to $8.5 trillion in 2009, representing an
annual growth rate of 22%. In order to establish ecommerce
capabilities, website owners often utilize various products and
services, including website creation tools, online shopping
carts, payment processing, and security tools such as SSL
certificates.
Electronic communications. Electronic communication has
proliferated for both personal and professional use. In
particular, email has become an essential means of
communication, and having an email address that serves as a
personalized or branded identifier has become increasingly
important for individuals and businesses. In order to have
a personalized or branded email address, such as
you@YourPersonalDomainName.com, the email address owner must
also register the associated domain name, or
YourPersonalDomainName.com in this example. As a result,
individuals and businesses are increasingly registering domain
names in order to obtain a personalized or branded email
address. Additionally, service providers are increasingly
offering electronic communications features such as mobility,
collaboration, fax through email and email marketing services.
The dynamic nature of the Internet, including the proliferation
of content, ecommerce and applications online, as well as the
continued advancement of its related technologies, create a
number of challenges for individuals and businesses seeking to
establish, maintain and evolve an online presence. Some of these
challenges include:
Establishing a meaningful online presence. To establish a
meaningful online presence, individuals and businesses must
identify, purchase and register a domain name, and then design
and build a website incorporating the appropriate features and
functionality. Many individuals and small businesses lack the
technical knowledge and skills necessary to complete this entire
process, and attempting to do so is frequently time-consuming
and expensive. These individuals and businesses often must
consult numerous online and offline resources or procure the
services of outside consultants to assist them. Additionally,
the need to obtain software and services from a variety of
vendors often adds complexity and increases the risk that these
solutions will not integrate or operate properly with each other.
Maintaining and evolving a website. Having created a
website, individuals and businesses must store the
website’s content on their own server or utilize a
third-party hosting provider. Over time, individuals and
businesses may also want to incorporate additional features and
functionality that address their evolving needs. For example,
some businesses may want to incorporate ecommerce functionality,
productivity tools and marketing capabilities into their
websites, while some individuals may want to create weblogs, or
blogs, podcasts and online forums on their websites. As the
Internet grows and new technology is developed, individuals and
businesses are continuously challenged to keep pace by upgrading
the functionality and performance of their websites and the
server capacity necessary to store increasing volumes of content.
Ensuring website availability and security.Websites are
constantly exposed to the risk of slow performance or network
downtime, which can result in lost revenue, customer
dissatisfaction and reputational damage for businesses and lost
content, increased cost and inconvenience for individuals. In
addition, website operators face an array of increasingly
sophisticated security threats, such as computer hacking, denial
of service attacks, domain name and online data theft, and other
online fraud. Protecting a website from potential system
failures and security threats often requires the use of a
variety of solutions or providers, which can lead to high system
costs, significant upgrade expenses and interoperability
challenges.
Accessing technical support.Website owners may
experience problems relating to their websites and thus desire
access to dedicated support personnel who can resolve these
technical challenges. Over time, they may also want to consult
with experts who are familiar with their needs and can advise
them about additional features or services that could enhance
their website’s performance, functionality or user traffic
levels. Since websites are “always on” and problems
can arise at any time, many customers want access to technical
support and consultation 24 hours per day, 7 days per
week, using the telephone, email or the Internet.
We believe that individuals and businesses prefer to address
these challenges by utilizing a single provider that can offer
them the comprehensive set of services and resources they need
to establish, maintain and evolve an online presence quickly and
easily.
Our Solution
We are a leading provider of services that enable individuals
and businesses to establish, maintain and evolve an online
presence quickly and easily. Key elements of our solution
include:
“One-stop shop” for establishing and maintaining an
online presence. We provide customers a single location
where they can register domain names, purchase the services and
functionality necessary to establish, maintain and update an
online presence, and access comprehensive technical support. We
offer our services either individually or as bundled suites of
integrated services targeted to meet the specific needs of
customers. We also address the evolving needs of customers whose
websites increase in content and sophistication over time by
offering additional value-added services including more advanced
website hosting and ecommerce, productivity and marketing tools.
Value-oriented services, features and functionality focused
on customer needs. Our corporate philosophy is to offer our
customers competitively priced, value-oriented services that
directly address their evolving needs. We actively monitor
trends in customer usage and market demand in order to develop
services that anticipate and respond to these customer needs. We
believe our customer-focused approach enhances our
customers’ satisfaction with us and engenders a high degree
of loyalty within our customer base. We have developed
substantially all of our service offerings internally and
believe our suite of services is
best-of-breed in the
industry in terms of comprehensiveness, performance,
functionality and ease of use.
Focus on customer care and advice. We strive to
consistently provide the highest levels of customer care and
support in the industry. We have over 750 professionally trained
customer care representatives who provide technical assistance
and also operate as “business consultants,” advising
customers of additional services that best suit their individual
needs. These customer care representatives are available for
consultation 24 hours per day, 7 days per week to
provide expert assistance and advice across the broad spectrum
of our services. In addition, our
easy-to-use website
contains extensive educational content designed to demystify the
process of establishing an online presence and to assist
customers in choosing the services that best meet their needs.
High level of system reliability and security. Our
technology infrastructure incorporates hardware, software and
services from leading suppliers and is designed to handle large
and expanding volumes of domain name registrations, website
hosting accounts and traffic on our own and our customers’
websites in an efficient, scalable and fault-tolerant manner.
Our hosting technology platform is designed to maximize the
performance and uptime of customers’ websites and to
protect customer data from security breaches.
Our Competitive Strengths
Our competitive strengths include the following:
Market leadership position. We are the world’s
largest domain name registrar, with approximately
13.6 million domain names under management as of
April 30, 2006. Moreover, during the final six months of
2005, we registered approximately one-third of all domain names
registered in the top five gTLDs — .com, .net, .org,
..biz and .info — according to ICANN. We are also North
America’s largest shared website hosting provider as of
April 30, 2006 as reported by Netcraft. Our leading market
positions in total domain names under registration, new domain
name registrations, and website hosting provide us with a number
of competitive advantages. We benefit from increased revenue
opportunities through sales of additional value-added services
to our existing customer base and from reduced customer
acquisition costs as a result of the large number of referrals
we receive from our customers. In addition, we benefit from
economies of scale and are able to allocate research and
development, advertising and various other costs across a large
customer base.
Active customer relationship management and lifecycle
marketing. We actively manage customer relationships to
identify opportunities to market additional services. Our
website and customer relationship management systems promote our
services and target customer needs as they establish, maintain
and evolve their online presence. Our website is designed, and
our customer care center personnel are trained and encouraged,
to cross-sell our services. We actively market additional
services both at the time of a customer’s initial purchase
and throughout the customer lifecycle through our email,
telephone, direct mail and other targeted marketing campaigns.
Our high level of customer service affords us many opportunities
to sell customers additional higher-margin services and enhances
our customer retention rates. We have found that customers
typically place multiple additional orders with us within the
first year of their initial purchases from us.
Strong brand recognition. We have established Go Daddy as
one of the leading brands in our industry. As a result of our
strong brand recognition, we attract a large number of potential
customers directly to our website, thus reducing our customer
acquisition costs and enhancing revenue growth. We have launched
a number of online and offline marketing initiatives to further
enhance awareness of our brand. These initiatives, including our
television advertisements during the two most recent Super
Bowls, often use humor to enhance the visibility and recognition
of the Go Daddy brand name. Our broad base of registered domain
name customers serves as an effective marketing channel for us,
providing us with follow-on sales opportunities and new sales
through word-of-mouth
referrals. In addition, we have expanded our marketing efforts
into other channels such as package inserts, podcasting, radio
and direct mail.
Leading proprietary technology. We have invested
significant resources in the internal development of services we
offer to our customers. The active relationships we maintain
with our customers helps us to monitor trends in the market and
develop services that meet their evolving needs. In-house
development of our technology enables flexibility in marketing
and pricing and reduces our licensing costs, thereby improving
our margins. Our internal development also enables us to offer a
set of services that are fully integrated and easy to use and
support. In addition, because of the familiarity we have with
the technology underlying our services, we are able to offer
superior care to customers requiring technical assistance.
Our Growth Strategy
We believe there is significant growth potential in our current
and future markets as a result of the continued growth in
Internet users and usage, the increasing benefits to individuals
and businesses from establishing an online presence, and the
relatively small percentage of Internet users who have
registered a domain name. The number of Internet users worldwide
was estimated to be 1.2 billion in 2005, and is estimated
to grow to approximately 2.2 billion in 2010, while only
approximately 94 million domain names were registered
worldwide as of December 31, 2005. We intend to achieve
further growth by pursuing the following key strategies:
Continue to grow our customer base. We plan to leverage
our market leadership positions and enhance awareness of our
brand in order to continue to expand our customer base. We
intend to further expand our customer base through our online
and offline marketing initiatives, with the goal of driving
increased traffic to our website, and converting a larger
percentage of our website visitors into customers. We plan to
continue to utilize website optimization tools and a variety of
promotional activities to increase our visitor conversion rates.
We also plan to continue to leverage our large base of satisfied
customers to generate a significant number of potential new
customers through word-of-mouth referrals.
Sell additional services to customers. We seek to
increase our average order size and revenue per customer by
serving as a “one-stop shop” for customers, thereby
creating opportunities to sell additional services both at the
initial time of purchase and throughout the customer lifecycle.
We utilize proprietary business intelligence technologies to
identify the additional services most likely to be purchased by
particular customers to maximize the revenue we generate from
each customer. We believe we can continue to provide significant
added value to customers as they establish and evolve their
online presence by selling them additional higher-margin
services.
Continue to expand and enhance our service offerings. We
plan to continue to introduce new services to meet the evolving
needs of customers, and to enhance our existing service
offerings. Our research and development department is organized
into over 15 specialized teams, and is currently developing new
services in the areas of mobilization, personalized content
development and enhanced website security, among others. Our
large customer base affords us significant opportunities to
realize revenue gains from each additional service we develop.
Strengthen our customer relationships. Ongoing customer
satisfaction is critical to our continued success and future
growth. We have established and continue to develop a brand
based on trust, service, value and technical expertise. As
Internet usage further penetrates the mainstream population, we
expect that the technical sophistication of the average user
will decrease, underscoring the vital role that investment in
world-class customer care will play in our future growth. By
further investing in our customer care operations and by growing
and evolving our suite of services in response to customer
demand, we aim to continue to generate a high degree of loyalty
within our customer base and to further improve our customer
acquisition and retention rates.
Pursue acquisitions and expand our international
presence. We plan to evaluate potential acquisitions that
may offer complementary technologies or services, as well as
geographic expansion opportunities.
Euromonitor International estimates that
non-U.S. Internet
users are expected to account for approximately 91% of the
estimated 2.2 billion worldwide Internet users in 2010.
Accordingly, we believe there are significant growth
opportunities in international markets, including Asia, Europe
and Latin America. We intend to expand our capabilities outside
of the U.S., both organically and through acquisitions.
Go Daddy Services
We have designed and developed an extensive set of on-demand
services that enable individuals and businesses to create,
maintain and evolve an online presence quickly and easily. We
offer our services either individually or as bundled suites of
integrated services designed for specific activities. Examples
of our bundled service offerings include our “eCommerce
Sites” package, which allows a business owner to augment
its website with ecommerce functionality, such as an integrated
shopping cart, SSL certificates and payment solutions, or our
“Family Hosting” package, which allows an individual
to register a domain name, build and host a website, and share
his or her family content online.
Our domain name registration services allow us to establish
customer relationships and act as a gateway product for our
website hosting and on-demand and other services. Of our
1.5 million and 2.4 million customers under contract
as of December 31, 2004 and December 31, 2005,
approximately 50% and 55% of our standard domain name customers
had purchased additional services, including website hosting,
on-demand services or other services. We believe the website
hosting and on-demand and other services described below
increase our revenue and margin levels, improve domain name
registration renewal rates and add significantly to our value
proposition to customers. Our services include the following:
Domain Name Registration Services
We had approximately 13.6 million domain names under
management as of April 30, 2006 and registered
approximately one-third of all domain names in the top five
gTLDs — .com, .net, .org, .biz, and .info —
in the last six months of 2005. Developing a large and growing
base of domain names under registration allows us to capture
customers at the entry point of their website development
efforts. Sales of domain name registrations accounted for
approximately 68% of total revenue in 2003, 66% of total revenue
in 2004 and 60% of total revenue in 2005. In 2005, our customer
renewal rate for expiring domain name registrations was
approximately 62%.
Standard Domain Name Registration. Using our website,
potential customers can search for, establish the availability
of, and, if it is available, register a particular domain name.
If a domain name is not available, our website automatically
recommends similar names and other TLDs that are available, and
allows customers to back-order a domain name registered by
another registrant. We currently sell our standard domain name
registration for the .com TLD, together with basic
advertising-supported website hosting, free blog service and a
single email account, for $8.95 per year for a one-year
term. We offer discounts to purchasers of multiple domain names,
multi-year contracts and larger multi-service bundles.
Domain Name Transfer. We offer customers the ability to
transfer the registration of a single domain name or multiple
domain names to us from other registrars using our automated
domain name transfer service. We also provide customers a
concierge service to assist them in the domain name transfer
process.
Domain Name Privacy. Our domain name privacy service
allows customers to register a domain name through us on an
“unlisted” basis, protecting them from privacy
intrusions based on exposure of their personal or corporate
information. This privacy service also enables businesses to
secure a name confidentially for an unannounced product, service
or idea.
Business Registrations. Our business domain name
registration service provides business customers with a
differentiated advertising opportunity in the public WhoIs
database, which is searched by Internet users millions of times
per day. This service enables customers to include in this
database specific details about their business that would not
typically be found in the database and provides information
similar to a Yellow Pages directory listing. These business
details might include the business’ hours of operation, a
map to the
We operate, maintain and support website hosting in our own
facilities using either Linux or Windows operating systems.
Sales of website hosting services accounted for approximately
22% of total revenue in 2003, 20% of total revenue in 2004 and
22% of total revenue in 2005. Our current hosting plan pricing
starts at $3.99 per month for shared hosting,
$34.99 per month for virtual dedicated hosting and
$88.99 per month for dedicated hosting.
Website Hosting on Shared Hosting Servers. The term
“shared hosting” refers to the housing of multiple
websites on the same server. We currently offer three tiers of
shared website hosting plans bundled with a variety of
applications and services such as web analytics and SSL
certificates.
Website Hosting on Virtual Dedicated Servers. The term
“virtual dedicated hosting” refers to the use of
software to partition a single physical server so that it
functions as multiple servers. A virtual dedicated server
provides the customer with full control and electronic access,
additional disk space and bandwidth, and up to three dedicated
IP addresses. Our website hosting on virtual dedicated servers
expands our basic shared hosting service to meet the needs of
most of our individual and business customers.
Website Hosting on Dedicated Servers. The term
“dedicated hosting” refers to the housing of a website
on a single server dedicated solely to that customer. We offer
three fixed-price plans, depending on the customer’s
desired hardware, performance and control features. In addition,
customers may choose to configure their own plan and choice of
options. This service includes electronic customer access to the
server, comprehensive customer support and network monitoring.
On-Demand and Other Services
We offer a variety of on-demand and other services that enable
customers to enhance and optimize their online presence,
including website creation, ecommerce, productivity and website
marketing solutions. On-demand services and other revenue
comprised 10% of total revenue in 2003, 14% of total revenue in
2004 and 18% of total revenue in 2005, with a small portion of
this revenue derived from enrollment fees paid to us by
resellers and, in 2005, the sale of advertising on parked pages
registered with us.
Website Tonight. Our Website Tonight service is a tool
that enables customers to build their own websites. We offer
customers three fixed-price plans depending on their desired
number of website pages, level of required storage, amount of
required bandwidth and number of email accounts. With each of
these plans, customers have access to over 100 professionally
designed templates, which can be personalized by adding photos,
graphics or text, as well as several theme-based categories with
specialty content for small businesses, organizations, families,
athletic teams, weddings, reunions and other categories.
Quick Blog. Our Quick Blog service enables users to
create blogs for posting personalized content on the Internet
and sharing these postings with others. This service includes
access by multiple authors to multiple blogs, 50 customizable
templates, image and audio file uploading, survey capabilities,
site statistics, email updates, spam protection and tools to
manage the blog according to customer preferences.
eCommerce
SSL Certificates. SSL certification allows Internet users
to verify the identity of other users as a means of increasing
the security of online transactions and communications. We offer
SSL certificates in 128-bit or 256-bit encryption, depending on
customer security requirements, and for time periods ranging
from one to ten years.
Quick Shopping Cart. Our Quick Shopping Cart service
allows customers to create their own stand-alone store or add
one to an existing website. Quick Shopping Cart also allows
customers to post their product catalogs, integrate online sales
information with Intuit Inc.’s QuickBooks product, list
products for auction on eBay, streamline shipping logistics,
accept credit card and PayPal payments on their websites, and
market their websites through Google services.
Merchant Accounts. Our merchant account service provides
customers with tools to process credit card payments online for
goods and services sold on their websites. Proceeds from the
sale of goods and services, net of credit card fees, are
electronically deposited in the customer’s bank account.
Productivity Tools
Email Accounts. We offer email accounts under three
fixed-price plans, with pricing dependent on the customer’s
desired level of storage and number of email addresses. Our
standard email account is a core component of many of our suites
of bundled services. All of our email accounts are
advertising-free and incorporate protection from spam, viruses
and other forms of online fraud such as phishing.
Online File Folder. Our Online File Folder service allows
customers to store, access, transfer, encrypt and share files,
such as presentations, spreadsheets, reports, music, photos and
video clips, online from any Internet-connected computer.
Fax Thru Email. Our Fax Thru Email service allows
customers to send and receive faxes from any Internet-connected
computer. We offer three monthly plans for this service, with
pricing dependent on the customer’s volume of usage.
Online Group Calendar. Our Online Group Calendar service
is an organizational tool that keeps track of group activities,
events and important dates, and can be used to send email
reminders automatically. This password-protected tool enables
customers to search their group’s calendar to schedule
events for the group, manage tasks and upload files to share
with other group members.
Marketing Tools
Traffic Blazer. Our Traffic Blazer service is designed to
attract traffic to customers’ websites by helping them
prepare and optimize web pages for, and submit them to, leading
Internet and blog search engines and directories. It is designed
to facilitate successful Internet marketing for individuals and
businesses that recognize the increasing importance and reach of
search engines.
Traffic Facts. Our Traffic Facts service offers customers
web analytics to gather, manipulate and graphically report
statistical data affecting their websites’ success,
including information about visitors to their website, entry and
exit pages, referring domain names and search engines, the
number of sessions and pages viewed, and the volume of bandwidth
used.
Express Email Marketing. Our Express Email Marketing
service enables customers to market their businesses online
through email and, at the same time, manage customer
information, design email advertising campaigns, conduct
surveys, and prepare marketing and user reports.
Other Services
Domain Name Auctions. We offer domain name owners a
series of online auction services through our websitewww.TheDomainNameAfterMarket.com, or www.tdnam.com. These
after-market services allow domain name owners to sell their
domain names through a traditional online auction, an
offer/counteroffer auction, an expired name auction or a
“buy now” auction. We receive a percentage of the
sales price for each domain sold in an auction.
Domain Name Appraisals. Domain name appraisals give
individuals seeking to purchase or sell domain names an estimate
of the value of those names based on a number of key criteria,
including commercial use value, name length and brand
recognition. The results of this appraisal are available to the
customer within two hours and can be shared with third parties
or kept confidential. A customer can also have us certify an
appraisal so that prospective after-market purchasers of a
domain name can view the appraisal and valuation criteria.
Sales and Marketing
We focus our sales and marketing efforts primarily on the online
needs of individuals and small businesses. We promote Go
Daddy as a “one-stop shop,” offering value-oriented
pricing and a strong commitment to customer care and support.
Sales. We sell our services primarily through our
websites and our customer care center. We also receive revenue
through automated billing for renewals of services previously
purchased. Additionally, we have a network of third parties that
refer customer prospects to us or resell our services. We pay
our resellers an amount based on the difference between the
pricing of their sale of the given service and the wholesale
rate upon which we agree. Through our wholly-owned subsidiary,
Wild West Domains, we have contractual relationships with over
20,000 resellers to resell our domain name registration and
other services under their own brands. For example, Dell Inc.
acts as a reseller of our services to its small business
customer base. In 2005, reseller enrollment fees and sales
through our Wild West Domains subsidiary accounted for 15% of
total revenue.
Marketing. Our marketing strategy uses brand marketing
initiatives to drive traffic to our website and to raise
awareness of Go Daddy as the leading provider of domain name
registration, website hosting and other on-demand services. We
supplement these initiatives with our direct marketing efforts
aimed at converting potential customers into actual customers,
promoting additional sales to our existing customer base, and
improving our renewal rates on previously sold services. Our
marketing programs include a variety of online and offline
advertising initiatives and public relations activities targeted
primarily at individuals and small businesses, which comprise
the core base of our customers.
Our principal marketing initiatives are:
•
Offline advertising — including advertising on
television and radio and in print media. We launched a
television advertising campaign during the 2005 Super Bowl, and
since then have conducted further television advertising that
featured cable television advertising and commercials aired
during the 2006 NFL Playoffs and the 2006 Super Bowl. In
addition, we have recently launched package insert campaigns
with market-leading third parties such as Dell and Amazon.com.
•
Online advertising — including search-based ads,
banner ads, targeted email campaigns, podcast advertising and
the use of domain names that are registered with us but do not
yet contain an active website, known as “parked pages.”
•
Customer retention and appreciation marketing
efforts — including direct mail and email campaigns,
as well as telesales
follow-up contacts. We
use these campaigns and contacts to market additional services
that we determine might be useful to customers based on their
prior purchases with us.
In addition to these marketing initiatives, we believe that the
breadth and quality of our service offerings and the high level
of customer care and support we provide, create significant
goodwill and result in positive referrals from our customers. We
believe this
word-of-mouth
advertising is an important complement to our marketing
initiatives.
Customers
Our customer base is comprised primarily of individuals and
small businesses, and, to a much lesser extent, of large
businesses and governmental agencies that purchase specific
services, such as domain name registrations and SSL
certificates. As of December 31, 2005, we had approximately
2.4 million customers under contract. No customer accounted
for more than 5% of total revenue in 2003, 2004 or 2005.
Sales from transactions outside the U.S. accounted for 14%
of our total sales in 2003, 14% in 2004 and 13% in 2005. We
believe that sales to customers outside the U.S. will
account for an increasing portion of total sales in future
periods.
We believe our ability to establish and maintain long-term
relationships with our customers and to differentiate ourselves
from our competitors depends significantly on the strength of
our customer care and support operations. Moreover, we believe
that superior customer care and support are critical to
retaining, expanding and further penetrating our customer base.
We have tightly integrated our customer care center with our
development organization in order to identify rapidly and
respond precisely to our customers’ needs. As of
March 31, 2006, our customer care organization had 752
employees.
Our customers have access to our customer care center
24 hours per day, 365 days per year using the
telephone, email or the Internet. Customer care center employees
handle general customer inquiries, such as payment and product
feature queries and technical questions about customers’
existing services, as well as provide information about
additional services we offer. Many of our customer care
employees are technical support specialists extensively trained
in the use of our services. Our customer care center personnel
are trained and encouraged to act as “business
consultants” who cross-sell and up-sell a variety of
services that may be of value to particular customers, both in
response to inbound customer inquiries and as part of our
outbound customer retention and appreciation initiatives. As a
result of these “needs-based” selling efforts, the
average order size generated by our customer care personnel in
2005 was $65.00, compared to an overall average order size of
$26.81.
Technology and Development
Technology
We have built our services, systems and networks for
reliability, scalability, flexibility and security. We use
hardware and software from leading technology vendors such as
Cisco, Dell, Microsoft, Network Appliance and Red Hat. Our
systems rely on a modular approach to capacity both for server
environments and for storage.
We undertake annual audits as required by the payment card
industry to ensure all our card processing services meet PCI
standards. We also undertake an annual Webtrust for Certificate
Authorities audit to ensure that our infrastructure that
processes SSL certificates meets all Webtrust requirements.
Facilities. The systems supporting our own websites, our
website hosting and other services and our internal operations
are located at five facilities in the Phoenix, Arizona area. We
operate all of our facilities, and believe that they have ample
power, redundancy, fire suppression capabilities, bandwidth
capacity and backbone redundancy to support the current and
anticipated near-term growth of our business. We continuously
monitor these systems to improve various aspects of their
performance.
Reliability. Our technology platform is designed to
maximize reliability and system uptime. We use redundant
hardware components to ensure high levels of availability. We
achieve software and data reliability through a variety of
devices, processes and quality-assurance procedures. Depending
on the specific system, our standard procedures include daily
database backups, storage of critical information in multiple
formats and incremental backups of ongoing database
modifications.
Scalability and Flexibility. Our systems are designed to
handle large and expanding volumes of domain name registrations,
website hosting accounts, general website traffic and domain
name server queries in an efficient, scalable and fault-tolerant
manner. Our servers are clustered and use a highly available,
redundant shared file system that allows us to add additional
capacity without the need for costly system or technology
upgrades.
Security. Our technology incorporates a variety of access
controls and other security measures to protect domain name
registration and customer data, and to prevent unauthorized
access to our networks and systems. These include communications
using SSL, access control at network routers, and encryption and
authentication of user passwords. We have a team of security
operations personnel monitoring our systems 24 hours per
day, 7 days per week using multiple security devices,
providing forensic analysis, and gathering intelligence to
actively prevent security breaches.
Since our inception, we have chosen to develop substantially all
of our services internally, rather than licensing or acquiring
technology from third parties. Our internal research and
development capabilities allow us greater speed and flexibility
in developing new service offerings, minimize our licensing
costs and improve our ability to provide customer care and
support. We focus our research and development efforts on
enhancing our existing service offerings and developing new
services, both in response to our customers’ needs. Our
research and development department is organized into over 15
specialized development teams that totaled 119 employees as of
March 31, 2006. We believe that these solution-specific
teams ensure a more rapid and effective development effort. Our
research and development expenses were approximately
$3.5 million in 2003, $5.3 million in 2004 and
$9.7 million in 2005.
Competition
The markets for domain name registration and web-based services
are intensely competitive and rapidly evolving. We expect
competition to increase in the foreseeable future as new
competitors enter the market and as our existing competitors
expand their service offerings. Our current competitors include
domain name registrars, independent software companies, website
design firms, website hosting companies, Internet service
providers, Internet portals and search engine companies. Many of
these competitors, and in particular Google, Microsoft and
Yahoo!, have greater resources, brand recognition and consumer
awareness, and larger customer bases than we have.
Current principal competitors in our markets include:
•
companies that primarily focus on domain name registration,
including eNom (recently acquired by Demand Media), Melbourne
IT, Network Solutions, Register.com and Schlund (a division of
United Internet);
•
companies that compete with us primarily in the area of website
hosting services, including 1&1 Internet (a division of
United Internet) and Web.com (formerly known as Interland);
•
companies that compete with us primarily in the area of SSL
certification services, including GeoTrust, Thawte and
VeriSign; and
•
diversified Internet companies, including Google, Microsoft and
Yahoo!, that currently offer, or may in the future offer, a
broad array of web-based products and services, including domain
name registration, website hosting and other products and
services targeted at helping individuals and small businesses
gain an online presence.
We believe the principal competitive factors in selling domain
name registrations, website hosting services and on-demand
services to individuals and businesses include the following:
•
flexibility, quality and functionality of service offerings;
•
brand name and reputation;
•
price;
•
quality and responsiveness of customer support and service;
•
ease of use, implementation and maintenance of service
offerings; and
•
reliability and security of service offerings.
We believe we have established a favorable competitive position
on all of these factors.
Intellectual Property
Our success and ability to compete are dependent in part on our
ability to develop and maintain proprietary technologies and to
operate without infringing on the intellectual property of
others. We rely on a combination of patent, trademark, service
mark, copyright and trade secret laws in the U.S. and other
jurisdictions to protect our intellectual property and our
brand. We have 59 U.S. patent applications pending. Our
patent applications relate generally to methods for registering
domain names, improved electronic communication systems and
versatile ecommerce tools, among other things. In addition, we
enter into confidentiality and invention assignment agreements
with our employees and consultants and vigorously control
distribution of and access to our proprietary information and
technology. We license technology from third parties that we use
in our website hosting business and in limited elements of a few
of our services. License agreements for third-party software
include provisions intended to protect our intellectual
property. None of our services is substantially dependent on any
third-party software.
While our patent applications, copyrights, trademarks and other
intellectual property rights are important, we believe that our
technical expertise and our ability to introduce new products
and features that meet the needs of our customers are more
important in maintaining our competitive position.
Administration of the Internet and Government Regulation
Administration
From January 1993 until April 1999, Network Solutions, Inc. was
the sole entity authorized by the U.S. government to act as
either a registrar or a registry for domain names in the .com,
..net and .org TLDs. In November 1998, the U.S. Department
of Commerce authorized ICANN, through a Memorandum of
Understanding, to oversee key aspects of the domain name
registration system. In 2000, Network Solutions was acquired by
VeriSign, Inc., which sold the registrar portion of its business
and the Network Solutions name in November 2003. In May 2001,
ICANN and VeriSign entered into an agreement under which
VeriSign would operate the .com top level domain registry until
at least 2007, when the original agreement expires. In February
2006, VeriSign negotiated a renewal of this contract with ICANN
that, upon final approval from the U.S. Department of
Commerce, would result in VeriSign’s continuing to operate
the .com registry until 2012 and perhaps beyond that date.
ICANN’s board of directors has also named VeriSign as the
designated .net registry until 2011. Other registries include
Public Interest Registry for .org, Afilias for .info and NeuStar
for .biz and .us.
ICANN maintains contracts with member entities such as
registrars and registries through which it enforces compliance
with its consensus policies. While these policies do not
constitute law in the U.S. or elsewhere, they have a
significant influence on the operation and future of the domain
name registration system. ICANN from time to time may create new
policies, subject to review and approval by a consensus of the
applicable supporting organizations and adoption by the ICANN
board of directors. Examples of new policies recently
implemented by ICANN include policies governing domain name
transfers and the deletion of un-renewed domain names.
Government Regulation
A combination of U.S. federal and state statutes and
foreign statutes regulate the liability of Internet service
providers, including domain name registrars. In addition, other
federal and state statutes that are not specific to Internet
regulation govern aspects of the domain name registration
business. These statutes include the following:
Communications Decency Act. The Communications Decency
Act, or CDA, regulates content of material on the Internet, and
provides immunity to Internet service providers and providers of
interactive computer services. The CDA and the case law
interpreting it provide that domain name registrars and website
hosting providers cannot be liable for defamatory or obscene
content posted by customers on websites unless they participate
in the conduct.
Digital Millennium Copyright Act. The Digital Millennium
Copyright Act of 1998, or DMCA, provides recourse for owners of
copyrighted material who believe that their rights under
U.S. copyright law have been infringed on the Internet. The
DMCA provides domain name registrars and website hosting
providers a safe harbor from liability for third-party copyright
infringement. However, to qualify for the safe harbor,
registrars and website hosting providers must satisfy a number
of requirements, including adoption of a user policy that
provides for termination of service access of users who are
repeat infringers, informing users of this policy, and
implementing the policy in a reasonable manner. In addition, a
registrar or a website hosting provider must remove or disable
access to content upon receiving a proper notice from a
copyright owner alleging infringement of its protected works by
domain names or content on hosted web pages. A registrar or
website hosting provider that fails to comply with these safe
harbor requirements may be found contributorily or vicariously
liable for third-party infringement.
Lanham Act. The Lanham Act governs trademarks and
servicemarks, and case law interpreting the Lanham Act has
limited liability for search engine providers and domain name
registrars in a manner similar to the DMCA. No court to date has
found a domain name registrar liable for trademark infringement
or trademark dilution as a result of accepting registrations of
domain names that are identical or similar to trademarks or
service marks held by third parties, or by holding auctions for
such domain names.
Anticybersquatting Consumer Protection Act. The
Anticybersquatting Consumer Protection Act, or ACPA, was enacted
to address piracy on the Internet by curtailing a practice known
as “cybersquatting,” or registering a domain name that
is identical or similar to another party’s trademark, or to
the name of another living person, in order to profit from that
domain name. The ACPA provides that registrars may not be held
liable for registration or maintenance of a domain name for
another person absent a showing of the registrar’s bad
faith intent to profit from the use of the domain name.
Registrars may be held liable, however, for failure to comply
with procedural steps set forth in the ACPA. For example, if
there is litigation involving a domain name, the registrar is
required to deposit with the court a certificate representing
the domain name registration, and cannot transfer or otherwise
modify the registration during the court action except by court
order.
Privacy and Data Protection. In the area of data
protection, the U.S. Federal Trade Commission and certain
state agencies have investigated various Internet
companies’ use of their customers’ personal
information, and the federal government has enacted legislation
protecting the privacy of consumers’ non-public personal
information. Other federal and state statutes regulate specific
aspects of privacy and data collection practices. Although we
believe that our information collection and disclosure policies
comply with existing laws, if challenged, we may not be able to
demonstrate adequate compliance with existing or future laws or
regulations. In addition, in the European Union member states
and certain other countries outside the U.S., data protection is
more highly regulated and rigidly enforced. To the extent that
we expand our business into these countries, we expect that
compliance with these regulatory schemes will be more burdensome
and costly for us.
Domain Name Disputes
ICANN has adopted the Uniform Domain-Name Dispute-Resolution
Policy, or UDRP, which establishes an administrative process for
resolving disputes over registration of domain names. In their
contracts with ICANN, registrars agree to comply with and to
implement this policy. This policy defines a limited role for
registrars in the dispute resolution process, as registrars are
not permitted to make any changes to a domain name without
specific direction from a court or arbitration panel. In the
event of a dispute over the registration of a domain name, the
registrar is required to lock the disputed domain name so that
it cannot be transferred or otherwise modified during the
pendency of the dispute. Likewise, when the registrar receives
an order or decision from a court or arbitration panel, the
disputed domain name is updated accordingly.
ICANN also adopted the Transfer Dispute Resolution Policy, or
TDRP, which establishes a guideline for registrars to follow in
dealing with disputes over the transfer of a domain name from
one registrar to another. Under the TDRP, the gaining registrar
must provide to the losing registrar a Form of Authorization, or
FOA, to confirm that the registrant at the time of transfer
agreed to transfer the name. If the FOA does not confirm that
the registrant at the time of transfer confirmed the transfer,
the registrars may work together to reinstate the name to the
previous registrar. If an agreement cannot be reached between
the two registrars, the losing registrar may choose to lodge a
TDRP dispute through the relevant registry. If a dispute is
filed through the registry, the registry is responsible for
determining whether the domain name should be transferred back
to the losing registrar and ultimately reinstated to the
previous registrant.
Less frequently, domain name registration and transfer disputes
are resolved under the ACPA. The ACPA provides trademark and
service mark owners with legal remedies in these types of
disputes, including allowing a mark owner to bring an “in
rem” action to cancel registration of the disputed domain
name or to require the transfer of the domain name registration
to the mark owner. As discussed above, the ACPA provides that
domain name registrars may not be held liable for registering or
maintaining a domain name absent a showing of bad faith intent
to profit on the part of the registrar or a failure to comply
with procedural provisions.
These statutes do not eliminate tort liability for wrongful
conduct on the part of registrars in domain name or transfer
disputes. For a discussion of the leading case governing tort
liability in this area, please see “Risk
Factors — We may face liability or become involved in
disputes over registration of domain names and control over
websites.”
Employees
As of March 31, 2006, we had 1,119 employees. We have no
employees that are represented under a collective union
agreement. We consider our relationships with our employees to
be good.
Facilities
We currently conduct our operations primarily in seven separate
facilities. We lease approximately 46,000 square feet of
office space for our principal executive offices and a portion
of our customer care center in Scottsdale, Arizona, under a
lease agreement that expires in August 2008. In October 2005, we
acquired a 285,000 square foot building in Phoenix for
approximately $9.5 million. We anticipate utilizing this
building as our primary data center to support our website
hosting business and corporate infrastructure. We lease
approximately 50,000 square feet of office space in
Gilbert, Arizona, which houses a larger portion of our customer
care center and some research and development teams, under a
lease that expires in June 2011. We also lease space at three
other locations in the Phoenix area for additional data center
capacity and in one facility in Cedar Rapids, Iowa for marketing
and research and development personnel, under lease agreements
that expire between November 2006 and January 2011. If we
require additional space, we believe that we will be able to
obtain that space on commercially reasonable terms.
Legal Proceedings
We are a party to a number of legal proceedings arising in the
ordinary course of business, including disputes arising over
domain name ownership, network abuse such as email spam, online
“phishing” and other forms of Internet fraud, and
intellectual property rights. As of the date hereof, we are not
a party to or aware of any legal proceedings that individually,
or in the aggregate, will have a material adverse effect on our
business, financial position or results of operations.
Executive Vice President and Chief Marketing Officer
Michael J. Zimmerman
35
Chief Accounting Officer and Acting Chief Financial Officer
Christine N. Jones
37
General Counsel and Corporate Secretary
Directors:
Thomas F.
Mendoza(2)
55
Director
Charles J.
Robel(1)(2)(3)
56
Director
Greg J.
Santora(1)(2)(3)
55
Director
Key Employees:
Robert T. Olson
41
Vice President of Business Operations
Theresa J. D’Hooge
38
Vice President of Marketing
Timothy J. Ruiz
51
Vice President of Corporate Development and Policy Planning
Patrick C. Pendleton
46
Chief Information Officer
Neil G. Warner
49
Chief Information Security Officer and President, Domains by
Proxy
(1)
Member of our audit committee.
(2)
Member of our leadership development and compensation committee.
(3)
Member of our nominating and governance committee.
Bob Parsonshas served as our Chief Executive Officer and
Chairman since he founded our company in 1997. Mr. Parsons
also served as our President from inception until February 2006.
Prior to founding Go Daddy, Mr. Parsons founded Parsons
Technology, Inc., a software company which was acquired by
Intuit Inc. in 1996. Mr. Parsons served in the
U.S. Marine Corps between 1968 and 1970 and is a recipient
of the Purple Heart Medal and Combat Action Ribbon.
Mr. Parsons is a Certified Public Accountant and holds a
B.S. in Accounting from the University of Baltimore.
Warren J. Adelmanhas served as our President since
February 2006, as our Chief Operating Officer since October
2004, and has served as a director since May 2006.
Mr. Adelman has also served as our Vice President of
Product and Strategic Development and Chief of Staff from
September 2003 to October 2004, and as our Vice President of
Strategic Development from January 2003 to September 2003. Prior
to joining us, Mr. Adelman served as Vice President of
Strategic Relations of Network Associates, Inc., an enterprise
security company, from February 2002 to October 2002. From
February 2001 to February 2002, Mr. Adelman served as Chief
Executive Officer and, from January 1999 to February 2001,
Mr. Adelman served as Vice President of Business
Development of NeoPlanet, Inc., a customer interaction software
company. Mr. Adelman holds a B.A. in Political Science and
History from the University of Toronto.
Barbara J. Rechterman has served as our Executive Vice
President and Chief Marketing Officer since July 1997. Prior to
joining us, Ms. Rechterman was employed from 1988 to June
1997 in various capacities
at Parsons Technology, Inc., including as Co-President, Vice
President and Controller. Ms. Rechterman is a Certified
Public Accountant and holds a B.A. in Accounting from the
University of Dubuque.
Michael J. Zimmerman has served as our Chief Accounting
Officer and Acting Chief Financial Officer since April 2006, and
served as our Chief Financial Officer from November 2003 to
April 2006 and between November 2001 and July 2002. From July
2002 to November 2003, Mr. Zimmerman served as Vice
President of our subsidiary, Wild West Domains, Inc. Prior to
joining us, Mr. Zimmerman served as Chief Financial Officer
of Mechanical Breakdown Administrators, Inc., an automobile
warranty company, from September 1999 to October 2001.
Mr. Zimmerman is a Certified Public Accountant and holds a
B.S. in Accounting from Lehigh University.
Christine N. Jones has served as our General Counsel and
Corporate Secretary since January 2002. Prior to joining us,
Ms. Jones practiced law at Beus Gilbert, PLLC, a private
law firm, between May 1997 and January 2002. Ms. Jones has
been a member of the American Bar Association and the State Bar
of Arizona since 1997. Ms. Jones is a Certified Public
Accountant and holds a J.D. from Whittier Law School and a B.S.
in Accounting from Auburn University.
Thomas F. Mendozahas served as a director since May
2006. Mr. Mendoza has been employed in various capacities
at Network Appliance, Inc., a data storage company, since 1994,
and has served as its President since 2000. Mr. Mendoza has
more than 31 years of experience as a high-technology
executive. Mr. Mendoza holds a B.A. in Economics from the
University of Notre Dame and is an alumnus of Stanford
University’s Executive Business Program.
Charles J. Robelhas served as a director since May 2006.
From June 2000 to December 2005, Mr. Robel served as a
General Partner and Chief Operating Officer of Hummer Winblad
Venture Partners, a venture capital firm focused on software
companies. From 1985 until 2000, Mr. Robel was a partner
with PricewaterhouseCoopers LLP. Mr. Robel also serves as a
director of Adaptec, Inc., Borland Software Corporation and
Informatica Corporation. Mr. Robel is a Certified Public
Accountant and holds a B.S. in Accounting from Arizona State
University.
Greg J. Santorahas served as a director since May 2006.
From December 2003 to September 2005, Mr. Santora served as
Chief Financial Officer of Shopping.com Ltd., an online provider
of comparison shopping services that was acquired by eBay Inc.
in August 2005. From 1997 through February 2003,
Mr. Santora served as Senior Vice President and Chief
Financial Officer for Intuit, Inc., a provider of small business
and personal finance software. Prior to Intuit, Mr. Santora
spent nearly 13 years at Apple Computer in various senior
financial positions including Senior Finance Director of Apple
Americas and Senior Director of Internal Consulting and Audit.
Mr. Santora, who began his accounting career with Arthur
Andersen LLP, has been a Certified Public Accountant since 1974.
Mr. Santora also serves as a director of Align Technology
Inc. and Digital Insight Corporation. Mr. Santora holds an
M.B.A. from San Jose State University and a B.S. in
Accounting from the University of Illinois.
Robert T. Olson has served as our Vice President of
Business Operations since August 2004. Mr. Olson also
served as our Director of Business Operations from November 2003
to August 2004 and as our Director of Product Management from
June 2003 to November 2003. Prior to joining us, Mr. Olson
served as Mountain Region Manager of FitLinxx, LLC, a fitness
and wellness technology company, from January 2003 to June 2003.
From August 2002 to November 2002, Mr. Olson was an
executive consultant to ABS School Services, LLC, a private
management company of charter schools. From August 2001 to May
2002, Mr. Olson served as a Vice President of Sales and
from April 2002 to August 2002, Director of Marketing of
NeoPlanet, Inc., a customer interaction software company.
Mr. Olson holds an M.B.A. from the University of Denver and
a B.S. in Accounting from Colorado State University.
Theresa J. D’Hooge has served as our Vice President
of Marketing since December 2004, as our Director of Database
Marketing from June 2004 to December 2004 and as our Senior
Advertising Manager from February 2003 to June 2004. From
October 2001 to February 2003, Ms. D’Hooge was an
independent consultant to automotive and software companies.
From February 2001 to October 2001, Ms. D’Hooge served
as Vice President of Operations of Marketing for Infinity
Marketing Solutions. From 1992 to January 2001,
Ms. D’Hooge held various marketing management
positions at Parsons Technology, Inc. Ms. D’Hooge
holds a B.B.A. in Accounting from Mount Mercy College.
Timothy J. Ruiz has served as our Vice President of
Corporate Development and Policy Planning since February 2006.
Mr. Ruiz also served as our Vice President of Domains
Services from April 2003 to February 2006 and as our Director of
Business Development from April 2001 to April 2003.
Mr. Ruiz holds an A.S. in Computer Science from Iowa
Central Community College.
Patrick C. Pendleton has served as our Chief Information
Officer since March 2006. Prior to joining us,
Mr. Pendleton served as Vice President of Technical
Services of PetSmart, Inc., a retailer of specialty products and
services for pets, from March 2001 to March 2006.
Mr. Pendleton holds a B.S. in Business/ Management
Information Services from Elmhurst College.
Neil G. Warner has served as our Chief Information
Security Officer since May 2005 and as President of our Domains
by Proxy subsidiary since October 2004. Mr. Warner had also
served as our Director of Security and Business Continuity
Planning from May 2004 to May 2005. Mr. Warner served as
Director of Security and Technology of NDCHealth, Inc. (now,
Per-Se Technologies, Inc.), from October 1997 to May 2004.
Mr. Warner holds a B.S. in Management Studies from the
University of Maryland and an A.A.S. in Electronic Communication
from Georgia Military College.
There are no family relationships between any of our directors
or executive officers.
Board of Directors
Our board of directors currently consists of five members. Our
bylaws permit our board of directors to establish by resolution
the authorized number of directors, and five directors are
currently authorized.
As of the closing of this offering, our board of directors will
be divided into three classes of directors, serving staggered
three-year terms, as follows:
•
Class I will consist of Messrs. Mendoza and Adelman,
whose terms will expire at the annual meeting of stockholders to
be held in 2007;
•
Class II will consist of Mr. Santora, whose term will
expire at the annual meeting of stockholders to be held in
2008; and
•
Class III will consist of Messrs. Parsons and Robel,
whose terms will expire at the annual meeting of stockholders to
be held in 2009.
Directors for a class whose terms expire at a given annual
meeting will be up for re-election for three-year terms at that
meeting. Each director’s term will continue until the
election and qualification of his or her successor, or his or
her earlier death, resignation or removal. Any increase or
decrease in the number of directors will be distributed among
the three classes so that, as nearly as possible, each class
will consist of one-third of the directors. This classification
of our board of directors may have the effect of, among other
things, delaying or preventing changes in control of Go Daddy.
Director Independence
In May 2006, our board of directors undertook a review of the
independence of the directors and considered whether any
director had a material relationship with us that could
compromise that director’s ability to exercise independent
judgment in carrying out that director’s responsibilities.
As a result of this review, our board of directors determined
that Messrs. Mendoza, Robel and Santora, representing three
of our five directors, are “independent directors” as
defined under the rules of The Nasdaq Stock Market.
Committees of the Board of Directors
Our board of directors currently has three committees: an audit
committee, a leadership development and compensation committee
and a nominating and governance committee, each of which will
have the composition and responsibilities described below as of
the closing of this offering.
Messrs. Robel and Santora, each of whom is a non-employee
member of our board of directors, comprise our audit committee.
Mr. Robel is the chairman of our audit committee. Our board
of directors has determined that each of the members of our
audit committee satisfies the requirements for independence and
financial literacy under the rules and regulations of The Nasdaq
Stock Market and the SEC. Our board of directors has also
determined that Mr. Robel is an “audit committee
financial expert” as defined in SEC rules and satisfies the
financial sophistication requirements of The Nasdaq Stock
Market. The audit committee is responsible for, among other
things:
•
selecting and hiring our independent auditors, and approving all
audit and pre-approving any non-audit services to be performed
by them;
•
evaluating the qualifications, performance and independence of
our independent auditors;
•
monitoring the integrity of our financial statements and our
compliance with legal and regulatory requirements as they relate
to financial statements or accounting matters;
•
reviewing the adequacy and effectiveness of our internal control
policies and procedures;
•
discussing the scope and results of the audit with the
independent auditors and reviewing with management and the
independent auditors our interim and year-end operating results;
•
acting as our qualified legal compliance committee; and
•
preparing the audit committee report that the SEC requires in
our annual proxy statement.
Under the corporate governance standards of The Nasdaq Stock
Market, by no later than the first anniversary of the closing of
this offering, our audit committee must have three members, each
of whom is an independent director. In order to comply with
these requirements, we intend, prior to the closing of this
offering, to add an additional independent director who
satisfies the financial literacy requirements to the board of
directors and to the audit committee.
Leadership Development and Compensation
Committee
Messrs. Mendoza, Robel and Santora, each of whom is a
non-employee member of our board of directors, comprise our
leadership development and compensation committee.
Mr. Mendoza is the chairman of our leadership development
and compensation committee. Our board of directors has
determined that each member of our leadership development and
compensation committee meets the requirements for independence
under the rules of The Nasdaq Stock Market. The leadership
development and compensation committee is responsible for, among
other things:
•
reviewing and approving the following components of our chief
executive officer’s and other executive officers’
compensation, as applicable: annual base salary; annual
incentive bonus including the specific goals and amount; equity
compensation; employment agreements; severance arrangements and
change in control agreements; and any other benefits,
compensation or arrangements;
•
evaluating and recommending incentive compensation plans to our
board of directors;
•
administering our equity incentive plans;
•
reviewing the succession planning for our executive officers and
coordinating the evaluation of potential successors to executive
officers; and
•
preparing the leadership development and compensation committee
report that the SEC requires in our annual proxy statement.
Nominating and Governance Committee
Messrs. Robel and Santora, each of whom is a non-employee
member of our board of directors, comprise our nominating and
governance committee. Mr. Santora is the chairman of our
nominating and
governance committee. Our board has determined that each member
of our nominating and governance committee meets the
requirements for independence under the current requirements of
The Nasdaq Stock Market. The nominating and governance committee
is responsible for, among other things:
•
assisting our board of directors in identifying prospective
director nominees and recommending nominees for each annual
meeting of stockholders to the board of directors;
•
reviewing developments in corporate governance practices and
developing and recommending governance principles applicable to
our board of directors;
•
overseeing the evaluation of our board of directors and
management; and
•
recommending members for each board committee to our board of
directors.
Director Compensation
In May 2006, our board of directors adopted a compensation
program for outside directors. Pursuant to this program, each
non-employee director will receive the following compensation
for board services, as applicable:
•
an annual director retainer of $40,000;
•
compensation for attending board of director meetings of $1,500;
•
compensation for attending committee meetings of $750;
•
an annual stipend of $15,000 for the audit committee chair and
$7,500 stipend for other committee chairs;
•
upon joining the board, an automatic initial grant of a stock
option to purchase 50,000 shares of Class A
common stock vesting as to one-quarter of the shares on the
one-year anniversary of the grant date and monthly thereafter so
that the award is fully vested four years after the grant
date; and
•
for each director whose term continues following an annual
meeting, an automatic annual grant of a stock option for the
purchase of 7,500 shares of Class A common stock
vesting as to one-quarter of the shares on the one-year
anniversary of the grant date and monthly thereafter so that the
award is fully vested four years after the grant date.
We made the automatic initial stock option grants described
above to Messrs. Mendoza, Robel and Santora in May 2006, each at
an exercise price of $14.52 per share, representing the fair
market value of our common stock on the date of grant as
determined by the board of directors.
Compensation Committee Interlocks and Insider
Participation
None of the members of our leadership development and
compensation committee is an officer or employee of Go Daddy.
None of our executive officers currently serves, or in the past
year has served, as a member of the board of directors or
compensation committee of any entity that has one or more
executive officers serving on our board of directors or
leadership development and compensation committee.
The following table provides information regarding the
compensation of our chief executive officer and our four other
most highly compensated executive officers during 2005. We refer
to these five executive officers as the named executive officers.
We generally pay a portion of our bonus compensation in the year
following the year in which they were earned. Bonus amounts
presented in the table above include amounts that were earned in
2005 and paid in 2006.
(2)
Consists of life insurance premiums.
(3)
Was also appointed President in February 2006.
(4)
Consists of life insurance premiums of $57, matching 401(k)
contributions of $4,000 and non-cash benefits of $15,300
including car allowance, memberships and communications services.
(5)
Consists of life insurance premiums of $57, matching 401(k)
contributions of $4,000 and non-cash benefits of $19,944
including car allowance, memberships and communications services.
(6)
Was appointed Chief Accounting Officer and Acting Chief
Financial Officer in April 2006.
(7)
Consists of life insurance premiums of $57, matching 401(k)
contributions of $4,000 and non-cash benefits of $11,705
including car allowance, memberships and communications services.
(8)
Consists of life insurance premiums of $57, matching 401(k)
contributions of $4,000 and non-cash benefits of $6,716
including car allowance, memberships and communications services.
The following table summarizes the stock options granted to each
named executive officer during 2005, including the potential
realizable value over the
10-year term of the
options, which is based on assumed rates of stock appreciation
of 5% and 10%, compounded annually, and subtracting from that
result the aggregate option exercise price. These assumed rates
of appreciation comply with the rules of the SEC and do not
represent our estimate of our future stock prices for our
Class A common stock. Actual gains, if any, on stock option
exercises will depend on the future performance of our
Class A common stock. The assumed 5% and 10% rates of stock
appreciation are applied to an assumed initial public offering
price of
$ per
share of our Class A common stock. The percentage of total
options granted to employees is based upon options to purchase
an aggregate of 829,400 shares of Class A common stock
we granted to employees during 2005.
Represents the fair market value of our Class A common
stock, as determined by our board of directors, on the date of
grant.
In March 2006, we granted Warren J. Adelman an option to
purchase 250,000 shares of our Class A common
stock at an exercise price of $9.10 per share, which
represented the fair market value of our Class A common
stock as determined by our board of directors on the date of
grant. In May 2006, we granted Warren J. Adelman an option to
purchase 608,046 shares of our Class A common stock,
Barbara J. Rechterman an option to purchase 194,900 shares
of our Class A common stock, Michael J. Zimmerman an option
to purchase 341,050 shares of our Class A common
stock, and Christine N. Jones an option to purchase
472,900 shares of our Class A common stock, with each
such option having an exercise price of $14.52 per share, which
represented the fair market value of our Class A common
stock as determined by our board of directors on the date of
grant. The options granted in May 2006 were all granted with an
expiration date no later than ten years from the date of grant,
but earlier in case of termination of employment, and all
options granted under the 2006 Equity Incentive Plan prior to
this offering will automatically expire on the first anniversary
of the date of grant if this offering does not occur or if a
change in control of Go Daddy does not occur by that date.
Option Exercises in Last Fiscal Year and Fiscal Year-End
Option Values
None of our named executive officers exercised stock options
during 2005. The following table sets forth information
concerning the number and value of exercisable and unexercisable
options held by the named executive officers who held options as
of December 31, 2005. The value of unexercised
in-the-money options at
December 31, 2005 represents an amount equal to the
difference between an assumed initial public offering price of
$ per
share of Class A common stock and the option exercise
price, multiplied by the number of unexercised
in-the-money options.
An option is
in-the-money if the
fair market value of the underlying shares exceeds the exercise
price of the option.
All the options listed in this column were unexercisable as of
December 31, 2005 due to a restriction in our 2002 stock
option plan that prevents outstanding stock options from being
exercised prior to the earlier to occur of a change of control
involving Go Daddy or our common stock becoming listed and
publicly traded on a U.S. stock exchange. If this
restriction had not been in place, the following options would
have been exercisable as of December 31, 2005: Barbara J.
Rechterman as to 1,686,600 shares with a value of
$ ,
Warren J. Adelman as to 110,500 shares with a value of
$ ,
Michael J. Zimmerman as to 130,350 shares with a value of
$ ,
and Christine N. Jones as to 134,900 shares with a value of
$ .
Equity Compensation Plans
Prior to May 11, 2006, all options to purchase shares of
our Class A common stock had been granted from our Go Daddy
2002 Stock Option Plan. Following the closing of this offering,
we will no longer grant options under that stock option plan,
but will grant options to purchase only shares of our
Class A common stock from our 2006 Equity Incentive Plan.
In May 2006, we began granting options to purchase shares of our
Class A common stock under our 2006 Equity Incentive Plan.
2006 Equity Incentive Plan
Our board of directors adopted, and our sole stockholder at the
time approved, our 2006 Equity Incentive Plan in May 2006. Our
2006 Equity Incentive Plan provides for the grant of incentive
stock options, within the meaning of Section 422 of the
Internal Revenue Code of 1986, as amended, to our employees and
any parent and subsidiary corporations’ employees, and for
the grant of nonstatutory stock options, restricted stock,
restricted stock units, stock appreciation rights and
performance shares to our employees, directors and consultants
and our parent and subsidiary corporations’ employees and
consultants.
Number of Shares Reserved. We have reserved
7.0 million shares of our Class A common stock
for issuance under the 2006 Equity Incentive Plan. The number of
shares reserved for issuance under this plan will be increased
to include:
•
any shares of our Class A common stock reserved under our
Go Daddy 2002 Stock Option Plan that are not issued or subject
to outstanding grants on the date of this prospectus; and
•
any shares of our Class A common stock issuable upon
exercise of options granted under our Go Daddy 2002 Stock Option
Plan that expire or become unexercisable without having been
exercised in full.
In addition, our 2006 Equity Incentive Plan provides for annual
increases in the number of shares available for issuance
thereunder on the first day of each year, beginning with 2007,
equal to the lesser of:
•
2% of the combined total number of outstanding shares of our
Class A and Class B common stock on the last day of
the preceding year;
any lesser number determined by our board of directors.
Administration of the 2006 Equity Incentive Plan. Prior
to the closing of this offering, our board of directors is the
plan administrator responsible for administering our 2006 Equity
Incentive Plan. Our leadership development and compensation
committee will be the plan administrator responsible for
administering our 2006 Equity Incentive Plan upon the closing of
this offering. The plan administrator has the power to determine
the terms of the awards, including the exercise price, the
number of shares subject to the award, the exercisability of the
award and the form of consideration to pay the exercise price.
The plan administrator also has the authority to institute an
exchange program whereby the exercise prices of outstanding
awards may be reduced or outstanding awards may be surrendered
in exchange for awards with a lower exercise price.
Stock Options. The plan administrator will determine the
exercise price of options granted under our 2006 Equity
Incentive Plan, but with respect to nonstatutory stock options
intended to qualify as “performance based
compensation” within the meaning of Section 162(m) of
the Internal Revenue Code of 1986, as amended, and all incentive
stock options within the meaning of Section 422 of the
Internal Revenue Code of 1986, as amended, the exercise price
must at least be equal to the fair market value of our
Class A common stock on the date of grant. The term of an
incentive stock option may not exceed ten years. With respect to
any participant who owns 10% or more of the voting power of all
classes of our outstanding stock as of the grant date, the term
must not exceed five years and the exercise price must equal at
least 110% of the fair market value on the grant date. The plan
administrator determines the term of all other options. After
termination of an employee, director or consultant, he or she
may exercise his or her option for the period of time stated in
the option agreement. Generally, if termination is due to death
or disability, the option will remain exercisable for
12 months. In all other cases, the option will generally
remain exercisable for three months. However, an option may not
be exercised later than its expiration date.
Stock Appreciation Rights. We are authorized to grant
stock appreciation rights under our 2006 Equity Incentive Plan.
Stock appreciation rights allow the recipient to receive the
appreciation in the fair market value of our Class A common
stock between the exercise date and the date of grant. The plan
administrator determines the terms of stock appreciation rights,
including when these rights become exercisable and whether to
pay the increased appreciation in cash, with shares of our
Class A common stock, or with a combination thereof. Stock
appreciation rights expire under the same rules that apply to
stock options.
Restricted Stock Awards. We are authorized to grant
restricted stock awards under our 2006 Equity Incentive Plan.
Restricted stock awards are shares of our Class A common
stock that vest in accordance with terms and conditions
established by the plan administrator. The plan administrator
will determine the number of shares of restricted stock granted
to any employee. The plan administrator may impose whatever
conditions to vesting it determines to be appropriate. For
example, the plan administrator may set restrictions based on
the achievement of specific performance goals. Shares of
restricted stock that do not vest are subject to our right of
repurchase or forfeiture.
Restricted Stock Units. We are authorized to grant
restricted stock units under our 2006 Equity Incentive Plan.
Restricted stock units are awards of restricted stock,
performance shares or performance units that are paid out in
installments or on a deferred basis. The plan administrator will
determine the terms and conditions of restricted stock units,
including the vesting criteria and the form and timing of
payment.
Transferability of Awards. Unless the plan administrator
provides otherwise, our 2006 Equity Incentive Plan does not
allow for the transfer of awards and only the recipient of an
award may exercise an award during his or her lifetime.
Performance Shares. We are authorized to grant
performance shares under our 2006 Equity Incentive Plan.
Performance shares are awards that will result in a payment to a
participant only if performance goals established by the plan
administrator are achieved or the awards otherwise vest. The
plan administrator will establish organizational or individual
performance goals in its discretion, which, depending on the
extent to which they are met, will determine the number and/or
the value of performance shares to be paid out to participants.
Performance shares will have an initial value equal to the fair
market value of our Class A
common stock on the grant date. Payment for performance shares
will be made in shares of our Class A common stock, as
determined by the plan administrator.
Automatic Grants to Non-Employee Directors. Our 2006
Equity Incentive Plan also provides for the automatic grant of
stock appreciation rights, or options, to our non-employee
directors. Each non-employee director first appointed to the
board of directors after the closing of this offering will
receive an initial option to purchase 50,000 shares of
Class A common stock upon such appointment. This award will
vest as to one-fourth of the options subject to the award on the
first anniversary of the date of grant and monthly thereafter,
so as to be fully vested at the end of four years subject to the
director’s continued service on each relevant vesting date.
In addition, beginning in 2007, non-employee directors who have
been directors for at least six months will receive a subsequent
grant of an option to purchase 7,500 shares of
Class A common stock immediately following each annual
meeting of our stockholders. This award will be subject to the
same four year vesting schedule applicable to the initial award
described above, with vesting to commence on the date that the
subsequent award is granted and be subject to the
director’s continued service on the vesting date. All
awards granted under the automatic grant provisions will have a
term of ten years and an exercise price equal to the fair market
value on the date of grant.
Adjustments upon Merger or Change in Control. Our 2006
Equity Incentive Plan provides that, in the event of our
“change in control,” if the successor corporation or
its parent or subsidiary does not assume, or substitute an
equivalent award, for each outstanding award, then each
participant will fully vest in and have the right to exercise
all of his or her outstanding options and other awards. The plan
administrator is required to provide notice to the recipient
that he or she has the right to exercise the option or stock
appreciation right as to all of the shares subject to the award.
The option or stock appreciation right will terminate upon the
expiration of the period of time the plan administrator provides
in the notice. In the event the service of an outside director
is terminated on or following a change in control, other than
pursuant to a voluntary resignation, his or her options and
stock appreciation rights will fully vest and become immediately
exercisable, all restrictions on restricted stock will lapse,
all performance goals or other vesting requirements for
performance shares will be deemed achieved, and all other terms
and conditions will be deemed met.
Amendment and Termination of 2006 Plan. Our 2006 Equity
Incentive Plan will automatically terminate in 2016, unless we
terminate it sooner. Our board of directors has the authority to
amend, suspend or terminate the 2006 Equity Incentive Plan
provided its action does not impair the rights of any particular
participant in a manner different than other participants. If
the board amends the plan, it does not need to seek stockholder
approval of the amendment unless applicable law requires it.
Go Daddy 2002 Stock Option Plan
In July 2002, our then sole director and sole stockholder
adopted our Go Daddy 2002 Stock Option Plan. Our 2002 Stock
Option Plan permits the grant of nonqualified options to our
employees and employees of our related entities.
Number of Shares Reserved. We have reserved
6,700,000 shares of our Class A common stock for
issuance under the 2002 Stock Option Plan. As of
December 31, 2005, options to purchase
6,342,900 shares of our Class A common stock were
outstanding and 357,100 shares were available for grants
under the 2002 Stock Option Plan. Following this offering, we
will stop granting options under this plan.
Administration of the Go Daddy 2002 Stock Option Plan.
Prior to this offering, our board of directors served as the
administrator of our 2002 Stock Option Plan. After this
offering, our board of directors or our leadership development
and compensation committee will serve as the administrator of
this plan. The administrator has complete discretion to make all
decisions relating to our 2002 Stock Option Plan.
Eligibility. Our employees and employees of any of our
related entities are eligible to participate in our 2002 Stock
Option Plan.
Stock Options. None of the options subject to our 2002
Stock Option Plan are exercisable until (i) our
Class A common stock is listed and publicly traded on any
stock exchange in the U.S. or (ii) we are sold or
reorganized. A sale or reorganization for this purpose is when
more than 80% of the voting power of our
outstanding stock or more than 80% of our assets are transferred
to a third party. Vesting of shares subject to each option
begins on the grant date of the option. On each anniversary of
the grant date, 25% of the shares subject to that option vest
and become non-forfeitable. Subject to the restrictions in the
first sentence of this paragraph, after an employee’s
termination of employment, he or she may exercise his or her
option with respect to the shares vested as of the date of the
termination of employment for the period of 30 days after
such termination for any reason, including the death of the
employee. However, an option may not be exercised later than its
expiration date.
401(k) Plan
We offer a 401(k) plan to all employees who meet specified
eligibility requirements. Eligible employees may contribute up
to 15% of their respective compensation subject to limitations
established by the Internal Revenue Code. We may match 50% of
any participant’s contribution up to $4,000 of the
participant’s contributions. Participants are immediately
vested in their contributions plus actual earnings thereon.
Participants become 20% vested in our contributions plus
earnings thereon after two years of service and 20% each year
thereafter, becoming 100% vested after six years of service.
Limitation of Liability and Indemnification of Officers and
Directors
Upon the closing of this offering, we will adopt and file a new
certificate of incorporation and will amend and restate our
bylaws. Our new certificate of incorporation and bylaws will
provide that we will indemnify our directors and officers to the
fullest extent permitted by Delaware law, as it now exists or
may in the future be amended, against all expenses and
liabilities reasonably incurred in connection with their service
for or on our behalf. Our bylaws provide that we will advance
the expenses incurred by a director or officer in advance of the
final disposition of an action or proceeding, and permit us to
secure insurance on behalf of any officer, director, employee or
other agent for any liability arising out of his or her action
in that capacity, regardless of whether Delaware law would
otherwise permit indemnification. In addition, the new
certificate of incorporation provides that our directors will
not be personally liable for monetary damages to us for breaches
of their fiduciary duty as directors, unless they violated their
duty of loyalty to us or our stockholders, acted in bad faith,
knowingly or intentionally violated the law, authorized illegal
dividends or redemptions or derived an improper personal benefit
from their action as directors.
We have entered into indemnification agreements with each of our
directors and officers. These agreements provide for
indemnification for related expenses including attorneys’
fees, judgments, fines and settlement amounts incurred by any of
these individuals in any action or proceeding, and obligate us
to advance their expenses incurred as a result of any proceeding
against them as to which they could be indemnified. At present,
we are not aware of any pending or threatened litigation or
proceeding involving any of our directors, officers, employees
or agents in which indemnification would be required or
permitted. We believe provisions in our new amended and restated
certificate of incorporation and indemnification agreements are
necessary to attract and retain qualified persons as directors
and officers. In addition, we maintain liability insurance which
insures our directors and officers against certain losses under
certain circumstances.
The limitation of liability and indemnification provisions in
our certificate of incorporation and bylaws may discourage
stockholders from bringing a lawsuit against our directors for
breach of their fiduciary duty. They may also reduce the
likelihood of derivative litigation against our directors and
officers, even though an action, if successful, might benefit us
and other stockholders. Furthermore, a stockholder’s
investment may be adversely affected to the extent that we pay
the costs of settlement and damage awards against directors and
officers as required by these indemnification provisions. At
present, we are not aware of any pending litigation or
proceeding involving any of our directors, officers or employees
for which indemnification is sought, and we are not aware of any
threatened litigation that may result in claims for
indemnification.
CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
We describe below transactions and series of similar
transactions, since January 1, 2003, to which we were a
party or will be a party, in which:
•
the amounts involved exceeded or will exceed $60,000; and
•
a director, executive officer, holder of more than 5% of any
class of our voting securities or any member of their immediate
family had or will have a direct or indirect material interest.
We also describe below certain other transactions with our
directors, executive officers and sole stockholder prior to this
offering.
Change of Control Agreements with Executive Officers
In October 2005 and May 2006, we entered into change of control
agreements with Warren J. Adelman, Barbara J. Rechterman,
Michael J. Zimmerman and Christine N. Jones, which in
combination provide for the following benefits:
•
accelerated vesting of 100% of the shares subject to stock
options granted to each executive officer prior to May 11,2006 upon a change of control of Go Daddy; and
•
upon the completion of this public offering, accelerated vesting
of 50% of the then unvested shares subject to stock options
granted to each of these executive officers.
In addition, if, within eighteen months of a change of control
of Go Daddy, the executive officer’s employment is
terminated without cause or the executive officer terminates his
or her employment for good reason, the change of control
agreements in combination provide the following benefits:
•
accelerated vesting of 50% of the shares subject to stock
options granted on or after May 11, 2006;
•
all earned but unpaid compensation;
•
an amount equal to the total of the executive officer’s
base salary and bonus for the twelve-month period ending on the
executive’s termination date;
•
a one-year continuation of benefits, or the cash equivalent
thereof;
•
an amount equal to 130% of the remaining lease and insurance
payments on any vehicle leased by us on his or her behalf; and
•
if necessary, a cash payment in an amount sufficient after
payment of taxes on such payment to pay any excise taxes due
under Internal Revenue Code Section 4999 with respect to
any change in control benefits.
Distributions to Sole Stockholder
We have made aggregate distributions to our sole stockholder of
approximately $0.6 million in 2003; approximately
$5.1 million in 2004; and approximately $4.8 million
in 2005. In addition, we expect to make aggregate distributions
to our sole stockholder of approximately $3.8 million in
2006 prior to the completion of this offering and our conversion
to subchapter C corporation status.
Equity Grants to Executive Officers and Directors
We have granted options to purchase shares of our Class A
common stock to our named executive officers and directors. See
“Management — Director Compensation,”“Management — Stock Option Grants in Last Fiscal
Year,” and “Management — Option Exercises in
Last Fiscal Year and Fiscal Year-End Option Values.”
We pay our non-employee directors an annual cash retainer and
compensation for board meeting attendance, and grant them
options to purchase shares of our common stock. For more
information regarding these arrangements, see
“Management — Director Compensation.”
Indemnification Agreements
We have entered into indemnification agreements with each of our
directors and executive officers. For a description of these
agreements, see “Management — Limitation of
Liability and Indemnification of Officers and Directors.”
The following table sets forth information about the beneficial
ownership of our common stock as of December 31, 2005, and
as adjusted to reflect the sale of Class A common stock in
this offering, for:
•
each person known to us to be the beneficial owner of more than
5% of our common stock;
•
each of our named executive officers;
•
each of our directors;
•
all of our executive officers and directors as a group; and
•
the selling stockholders.
The address of each beneficial owner listed on the table is
c/o The Go Daddy Group, Inc., 14455 North Hayden Road,
Suite 219, Scottsdale, Arizona85260. We have determined
beneficial ownership in accordance with the rules of the SEC. We
believe, based on the information furnished to us, that the
persons named in the tables below have sole voting and
investment power with respect to all shares of Class A and
Class B common stock that they beneficially own, subject to
applicable community property laws.
In the table below, percentage ownership prior to this offering
is based on 36,601,656 shares of Class B common stock
outstanding. This figure reflects the number of shares of common
stock outstanding as of December 31, 2005, and gives effect
to our reincorporation and the institution of our dual-class
capital structure. This figure does not include shares subject
to outstanding stock options.
In the table below, percentage ownership after this offering is
based
on shares
of Class A common stock
and shares
of Class B common stock outstanding. These numbers reflect
the changes described above, as well as the exercise of stock
options to
purchase shares
of Class A common stock by a selling stockholder, all of
which will be sold in the offering. These figures do not include
shares subject to outstanding stock options.
In computing the number of shares of Class A common stock
beneficially owned by a person and the percentage ownership of
that person, we deemed outstanding shares of Class A common
stock subject to options held by that person that are currently
exercisable or exercisable within 60 days of
December 31, 2005. We did not deem these shares
outstanding, however, for the purpose of computing the
percentage ownership of any other person. Beneficial ownership
representing less than 1% is denoted with an asterisk (*).
The percentage of total voting power disclosed below represents
voting power with respect to all shares of our Class A and
Class B common stock, voting together as a single class.
Each holder of Class A common stock is entitled to one vote
per share of Class A common stock and the holder of
Class B common stock is entitled to two votes per share of
Class B common stock. The Class A common stock and
Class B common stock vote together as a single class on all
matters submitted to our stockholders for a vote.
Comprised entirely of shares held by a family limited
partnership of which Mr. Parsons is the sole beneficial
owner.
(2)
Comprised entirely of shares of Class A common stock
issuable upon the exercise of options that will occur
immediately following the effective date of this offering. These
options are not exercisable before this offering due to a
restriction in our 2002 Stock Option Plan that prevents them
from being exercised prior to the earlier to occur of a change
of control involving GoDaddy or our common stock becoming listed
and publicly traded on a U.S. stock exchange.
(3)
Comprised entirely of shares of Class A common stock
issuable upon exercise of options exercisable within
60 days after December 31, 2005. These options are not
exercisable before this offering due to a restriction in our
2002 Stock Option Plan that prevents them from being exercised
prior to the earlier to occur of a change of control involving
Go Daddy or our common stock becoming listed and publicly traded
on a U.S. stock exchange.
The following is a summary of the rights of our classes of
common stock and preferred stock and certain provisions of our
certificate of incorporation and bylaws. For more detailed
information, please see copies of our certificate of
incorporation and bylaws, which are filed as exhibits to the
registration statement of which this prospectus is a part.
Our certificate of incorporation authorizes two classes of
common stock: Class A common stock, which has one vote per
share, and Class B common stock, which has two votes per
share. Any holder of Class B common stock may convert his
or her shares at any time into shares of Class A common
stock on a share-for-share basis. The rights of the two classes
of common stock are identical except for the voting and
conversion right described in greater detail below. The
implementation of this dual class structure was required by Bob
Parsons, our principal stockholder, as a condition of
undertaking an initial public offering of our common stock. The
terms of the dual class structure were determined based on
negotiations between us and Bob Parsons. See “Anti-Takeover
Effects of Delaware Law and Our Certificate of Incorporation and
Bylaws — Dual Class Structure.”
Immediately following the closing of this offering, our
authorized capital stock will consist of
246,601,656 shares, with a par value of $0.001 per
share, of which:
•
200,000,000 shares are designated as Class A common
stock;
•
36,601,656 shares are designated as Class B common
stock; and
•
10,000,000 shares are designated as preferred stock.
As of December 31, 2005, we had no outstanding shares of
Class A common stock, 36,601,656 shares of
Class B common stock, all of which were held of record by
Bob Parsons, and no outstanding shares of preferred stock.
Common Stock
Voting Rights. Holders of our Class A and
Class B common stock have identical voting rights, except
that holders of our Class A common stock are entitled to
one vote per share and holders of our Class B common stock
are entitled to two votes per share. Holders of shares of
Class A common stock and Class B common stock will
vote together as a single class on all matters, including the
election of at-large directors, submitted to a vote of
stockholders, unless otherwise required by law. Delaware law
requires the holders of our Class A common stock or
Class B common stock to vote separately as a single class
if we amend our certificate of incorporation in a manner that
alters or changes the powers, preferences or special rights of
that class in a manner that affects them adversely or increases
or decreases the number of shares of that class.
Dividends. The holders of shares of Class A common
stock and Class B common stock will be entitled to share
equally in any dividends that our board of directors may
determine to issue from time to time out of funds legally
available therefor. In the event a dividend is paid in the form
of shares of common stock or rights to acquire shares of common
stock, the holders of Class A common stock will receive
shares of Class A common stock or rights to acquire shares
of Class A common stock, as the case may be, and the
holders of shares of Class B common stock will receive
shares of Class B common stock or rights to acquire shares
of Class B common stock, as the case may be.
Liquidation and Other Rights. Upon our liquidation,
dissolution or winding-up, the holders of shares of Class A
common stock and shares of Class B common stock shall be
entitled to share equally on a per share basis in all assets
remaining after the payment of liabilities and the liquidation
preferences of any outstanding shares of preferred stock.
Holders of Class A and Class B common stock have no
preemptive or subscription rights. There are no redemption or
sinking fund provisions applicable to the Class A or
Class B common stock. All outstanding shares of
Class B common stock are, and all shares of Class A
common stock to be outstanding upon closing of this offering
will be, fully paid and nonassessable.
Conversion Rights. Our shares of Class A common
stock are not convertible into any other shares of our capital
stock. Each share of Class B common stock is convertible
into one share of Class A common stock at any time at the
option of the holder.
All shares of Class B common stock will convert
automatically into shares of Class A common stock on a
one-for-one basis upon the first to occur of (1) such time
as the outstanding shares of Class B common stock represent
less than 15% of the aggregate number of shares of Class B
common stock and Class A common stock then outstanding or
(2) upon the affirmative vote of the holders of majority of
the shares of Class B common stock.
In addition, each share of Class B common stock will
convert automatically into one share of Class A common
stock upon any transfer, whether or not for value, except for
certain transfers described in our certificate of incorporation,
which include transfers to:
•
The spouse or lineal descendants, or the spouses or domestic
partners of those lineal descendants, of the holder of shares of
Class B common stock outstanding, who we refer to as our
Class B holder;
•
The executor or administrator of the estate of the Class B
holder, his spouse or lineal descendants, or the spouses or
domestic partners of those lineal descendants;
•
A trust for the benefit of the Class B holder, his spouse
or lineal descendants, the spouses or domestic partners of those
lineal descendants, or the parents of the spouse or lineal
descendents of Class B holders or the spouses or domestic
partners of those lineal descendants;
•
A charitable organization established by the Class B
holder, his spouse or lineal descendants, or the spouses or
domestic partners of such lineal descendants; or
•
Any other entity controlled by the Class B holder, his
spouse or lineal descendants, or the spouses or domestic
partners of such lineal descendants, or one or more trusts for
their benefit, or one or more charitable organizations
established by them; provided, however, each share of
Class B common stock will automatically convert into one
share of Class A common stock in any transfer by the above
persons or entities in a brokerage transaction or transaction
with a market maker, or in any similar open market transaction
on any securities exchange, national quotation system or
over-the-counter market.
Following this offering, we may not issue or sell any shares of
Class B common stock, or any securities convertible or
exercisable into shares of Class B common stock, except
pursuant to any stock splits, stock dividends, subdivisions,
combinations or recapitalizations with respect to our
Class B common stock.
Preferred Stock
Our board of directors will have the authority, without further
action by our stockholders, to issue from time to time up to
10,000,000 shares of preferred stock in one or more series.
Our board of directors may designate the rights, preferences,
privileges and restrictions of the preferred stock, including
dividend rights, conversion rights, voting rights, terms of
redemption, liquidation preference, sinking fund terms, and
number of shares constituting any series or the designation of
any series. The issuance of preferred stock could have the
effect of restricting dividends on our common stock classes,
diluting the voting power of our common stock classes, impairing
the liquidation rights of our common stock classes, or delaying
or preventing a change in control. This issuance could have the
effect of decreasing the market trading price of the
Class A common stock. The issuance of preferred stock or
even the ability to issue preferred stock could also have the
effect of delaying, deterring or preventing a change in control.
After the closing of this offering, no shares of preferred stock
will be outstanding, and we currently have no plan to issue any
shares of preferred stock.
Anti-Takeover Effects of Delaware Law and Our Certificate of
Incorporation and Bylaws
Our certificate of incorporation and our bylaws contain certain
provisions that could have the effect of delaying, deferring or
discouraging another party from acquiring control of us. These
provisions and certain provisions of Delaware law, which are
summarized below, are expected to discourage coercive takeover
practices and inadequate takeover bids. These provisions are
also designed, in part, to encourage persons seeking to acquire
control of us to negotiate first with our board of directors. We
believe that the benefits of increased protection of our
potential ability to negotiate with an unfriendly or unsolicited
acquirer outweigh the disadvantages of discouraging a proposal
to acquire us because negotiation of these proposals could
result in an improvement of their terms.
Dual-Class Structure. As discussed above, our
Class B common stock has two votes per share, while our
Class A common stock, which is the class of stock we are
selling in this offering and which will be the only class of
stock that is publicly traded and issued in the form of stock
options to our service providers, has one vote per share. After
the offering, Bob Parsons and persons and entities affiliated
with him will own all of our Class B common stock,
representing %
of the voting power of our outstanding capital stock. Pursuant
to our certificate of incorporation, the holder of shares of
Class B common stock may generally transfer such shares to
family members, including spouses and descendents or the spouses
or domestic partners of such descendents, without having the
shares automatically convert into shares of Class A common
stock.
Because of this dual-class structure and the number of shares he
owns, Bob Parsons, his affiliates, and his family members and
descendents are expected to retain significant influence over
our management and affairs, and will be able to control all
matters requiring stockholder approval, including the election
of directors and significant corporate transactions such as
mergers or other sales of our company or assets, even if they
come to own significantly less than 50% of the outstanding
shares of our common stock. So long as Bob Parsons and his
affiliates continue to control shares of Class B common
stock representing more than one-third of our total outstanding
common stock, they will control a majority of the voting power
of our common stock. This concentrated control will
significantly limit the ability of stockholders other than Bob
Parsons and his affiliates to influence corporate matters.
Moreover, Bob Parsons and his affiliates may take actions that
other stockholders do not view as beneficial.
Undesignated Preferred Stock. As discussed above, our
board of directors has the ability to issue preferred stock with
voting or other rights or preferences that could impede the
success of any attempt to change control of us. These and other
provisions may have the effect of deferring hostile takeovers or
delaying changes in control or management of our company.
Limits on Ability of Stockholders to Act by Written Consent
or Call a Special Meeting. Our certificate of incorporation
provides that when the holders of our outstanding Class B
common stock cease to represent a majority of the voting power
of our company, our stockholders will no longer be able to act
by written consent. This limit on the ability of our
stockholders to act by written consent may lengthen the amount
of time required to take stockholder actions. As a result, a
holder controlling a majority of our capital stock would not be
able to amend our bylaws or remove directors without holding a
meeting of our stockholders called in accordance with our bylaws.
In addition, our bylaws provide that special meetings of the
stockholders may be called only by the chairperson of the board,
the chief executive officer, our board of directors or one or
more stockholders which in the aggregate represent at least 30%
of the total votes entitled to be cast at the meeting. As a
result of the stock ownership of Mr. Parsons, other stockholders
may not call a special meeting, which may delay the ability of
our stockholders to force consideration of a proposal or for
holders controlling a majority of our capital stock to take any
action, including the removal of directors.
Requirements for Advance Notification of Stockholder
Nominations and Proposals. Our bylaws establish advance
notice procedures with respect to stockholder proposals and the
nomination of candidates for election as directors, other than
nominations made by or at the direction of our board of
directors or a committee of our board of directors. However, our
bylaws may have the effect of precluding the conduct of certain
business
at a meeting if the proper procedures are not followed. These
provisions may also discourage or deter a potential acquirer
from conducting a solicitation of proxies to elect the
acquirer’s own slate of directors or otherwise attempting
to obtain control of our company.
Board Classification. Our board of directors is divided
into three classes. The directors in each class will serve for a
three-year term, one class being elected each year by our
stockholders. For more information on the classified board, see
“Management — Board of Directors.” This
system of electing and removing directors may tend to discourage
a third party from making a tender offer or otherwise attempting
to obtain control of us, because it generally makes it more
difficult for stockholders to replace a majority of the
directors.
Delaware Anti-Takeover Statute. We are subject to the
provisions of Section 203 of the Delaware General
Corporation Law regulating corporate takeovers. In general,
Section 203 prohibits a publicly held Delaware corporation
from engaging, under certain circumstances, in a business
combination with an interested stockholder for a period of three
years following the date the person became an interested
stockholder unless:
•
prior to the date of the transaction, our board of directors
approved either the business combination or the transaction
which resulted in the stockholder becoming an interested
stockholder;
•
upon completion of the transaction that resulted in the
stockholder becoming an interested stockholder, the interested
stockholder owned at least 85% of the voting stock of the
corporation outstanding at the time the transaction commenced,
calculated as provided under Section 203; or
•
at or subsequent to the date of the transaction, the business
combination is approved by our board of directors and authorized
at an annual or special meeting of stockholders, and not by
written consent, by the affirmative vote of at least
662/3
% of the outstanding voting stock which is not owned by
the interested stockholder.
Generally, a business combination includes a merger, asset or
stock sale, or other transaction resulting in a financial
benefit to the interested stockholder. An interested stockholder
is a person who, together with affiliates and associates, owns
or, within three years prior to the determination of interested
stockholder status, did own 15% or more of a corporation’s
outstanding voting stock. We expect the existence of this
provision to have an anti-takeover effect with respect to
transactions our board of directors does not approve in advance.
We also anticipate that Section 203 may also discourage
attempts that might result in a premium over the market price
for the shares of common stock held by stockholders.
The provisions of Delaware law and the provisions of our
certificate of incorporation and bylaws, as amended upon the
closing of this offering, could have the effect of discouraging
others from attempting hostile takeovers and, as a consequence,
they might also inhibit temporary fluctuations in the market
price of our Class A common stock that often result from
actual or rumored hostile takeover attempts. These provisions
might also have the effect of preventing changes in our
management. It is possible that these provisions could make it
more difficult to accomplish transactions that stockholders
might otherwise deem to be in their best interests.
Transfer Agent and Registrar
The transfer agent and registrar for our common stock
is ,
located
at .
Prior to this offering, there has been no public market for our
Class A common stock. Future sales of our Class A
common stock in the public market, or the availability of those
shares for sale in the public market, could adversely affect
market prices prevailing from time to time. As described below,
other than
the shares
being offered in our initial public offering, no shares will be
available for sale shortly after this offering due to
contractual and legal restrictions on resale. Nevertheless,
sales of our Class A common stock in the public market
after those restrictions lapse, or the perception that those
sales might occur, could adversely affect the prevailing market
price at that time and our ability to raise equity capital in
the future.
Upon the closing of this offering, we will have outstanding an
aggregate of
approximately shares
of Class A common stock
and shares
of Class B common stock. All of the outstanding shares of
Class A common stock will have been sold by us and the
selling stockholders in this offering and will be freely
tradable without restriction or further registration under the
Securities Act, unless the shares are subsequently repurchased
by any of our “affiliates” as that term is defined in
Rule 144 of the Securities Act. All of the shares of
Class B common stock will be held by Bob Parsons, will be
“restricted shares” as that term is defined in
Rule 144 under the Securities Act, and will convert into
shares of Class A common stock upon transfer, except in
certain limited circumstances that are more fully described in
the section of this prospectus entitled “Description of
Capital Stock — Common Stock — Conversion
Rights.” Restricted shares may be sold in the public market
only if registered or if they qualify for exemption under
Rule 144, 144(k) or 701 under the Securities Act, which are
summarized below, or another exemption.
As a result of the
lock-up agreements
described below and the provisions of Rule 144,
Rule 144(k) and Rule 701 under the Securities Act, the
shares of our Class A common stock, excluding the shares
sold in this offering, that will be available for sale in the
public market are as follows:
Approximate
Number of
Date of Availability of Sale
Shares
As of the date of this prospectus
90 days after the date of this prospectus
At various times beginning 180 days after the date of this
prospectus
*
*
Of these
shares, will
be subject to volume limitations under Rule 144 as more
fully described below.
In addition, as of December 31, 2005, options to purchase a
total of 6,342,900 shares of Class A common stock were
outstanding, of which options to purchase 4,718,400 shares
were vested and will become exercisable upon the completion of
this offering. Other than the options being exercised by one of
our selling stockholders for shares being sold in this offering,
substantially all of such options are restricted by the terms of
the lock-up agreements
described below.
Lock-up
Agreements
Our stockholder and substantially all of the holders of our
outstanding stock options have signed
lock-up agreements that
prevents them from selling any shares of our Class A common
stock or any securities convertible into or exercisable or
exchangeable for shares of our Class A common stock for a
period of at least 180 days from the date of this
prospectus without the prior written consent of Lehman Brothers
and Merrill Lynch. This
180-day period may be
extended in the circumstances described below under
“Underwriting — Lock-Up Agreements.” When
determining whether or not to release shares from the
lock-up agreements,
Lehman Brothers and Merrill Lynch will consider, among other
factors, the stockholder’s reasons for requesting the
release, the number of shares for which the release is being
requested and market conditions at the time of the request.
In general, under Rule 144 of the Securities Act, beginning
90 days after the date of this prospectus a person deemed
to be our “affiliate,” or a person holding restricted
shares who beneficially owns shares that were not acquired from
us or any of our “affiliates” within the previous
year, is entitled to sell within any three-month period a number
of shares that does not exceed the greater of 1% of the then
outstanding shares of our common stock, which will equal
approximately shares
immediately after this offering, assuming no exercise of
outstanding options, or the average weekly trading volume of our
Class A common stock on the Nasdaq National Market during
the four calendar weeks preceding the filing with the SEC of a
notice on Form 144 with respect to that sale. Sales under
Rule 144 of the Securities Act are also subject to
prescribed requirements relating to the manner of sale, notice
and availability of current public information about us.
Rule 144(k)
Under Rule 144(k), a person who is deemed not to have been
one of our affiliates at any time during the 90 days
preceding a sale, and who has beneficially owned the shares
proposed to be sold for at least two years, including the
holding period of any prior owner other than an affiliate, is
entitled to sell the shares without complying with the manner of
sale, public information, volume limitation or notice provisions
of Rule 144. Beginning 180 days after the date of this
prospectus, shares
of our common stock will qualify as “Rule 144(k)”
shares.
Rule 701
Rule 701, as currently in effect, permits resales of shares
in reliance upon Rule 144 but without compliance with some
of the restrictions of Rule 144, including the holding
period requirement. Most of our employees, officers, directors
or consultants who purchased shares under a written compensatory
plan or contract (such as our current stock option plan) may be
entitled to rely on the resale provisions of Rule 701, but
all holders of Rule 701 shares are required to wait
until 90 days after the date of this prospectus before
selling their shares.
Stock Plans
We intend to file a registration statement on
Form S-8 under the
Securities Act to register shares of our Class A common
stock issued or reserved for issuance under our stock option
plans. Accordingly, shares registered under that registration
statement will be available for sale in the open market, unless
such shares are subject to vesting restrictions with us or, to
the extent applicable, the
lock-up restrictions
described above.
Lehman Brothers Inc. and Merrill Lynch, Pierce,
Fenner & Smith Incorporated are acting as the
representatives of the underwriters and the joint book-running
managers of this offering. Under the terms of an underwriting
agreement, which will be filed as an exhibit to the registration
statement, each of the underwriters named below has severally
agreed to purchase from us and the selling stockholders the
number of shares of Class A common stock shown opposite its
name below:
Number
Underwriters
of Shares
Lehman Brothers Inc.
Merrill Lynch, Pierce, Fenner & Smith
Incorporated
UBS Securities LLC
Cowen and Company, LLC
Piper Jaffray & Co.
JMP Securities LLC
Total
The underwriting agreement provides that the underwriters’
obligation to purchase shares of Class A common stock
depends on the satisfaction of the conditions contained in the
underwriting agreement including:
•
the obligation to purchase all of the shares of Class A
common stock offered hereby (other than those shares of
Class A common stock covered by their option to purchase
additional shares as described below), if any of the shares are
purchased;
•
the representations and warranties made by us and the selling
stockholders to the underwriters are true;
•
there is no material change in our business or the financial
markets; and
•
we deliver customary closing documents to the underwriters.
Commissions and Expenses
The following table summarizes the underwriting discounts and
commissions we and the selling stockholders will pay to the
underwriters. These amounts are shown assuming both no exercise
and full exercise of the underwriters’ option to purchase
additional shares. The underwriting fee is the difference
between the initial price to the public and the amount the
underwriters pay to us and the selling stockholders for the
shares.
No
Full
Exercise
Exercise
Per share
$
$
Total
The representatives of the underwriters have advised us that the
underwriters propose to offer the shares of Class A common
stock directly to the public at the public offering price on the
cover of this prospectus and to selected dealers, which may
include the underwriters, at such offering price less a selling
concession not in excess of
$ per
share. The underwriters may allow, and the selected dealers may
re-allow, a discount from the concession not in excess of
$ per
share to other dealers. After the offering, the representatives
may change the offering price and other selling terms.
The expenses of the offering that are payable by us are
estimated to be
$ ,
excluding underwriting discounts and commissions.
One of the selling stockholders, Bob Parsons, has granted the
underwriters an option exercisable for 30 days after the
date of the underwriting agreement to purchase, from time to
time, in whole or in part, up to an aggregate
of shares
at the public offering price less underwriting discounts and
commissions. This option may be exercised if the underwriters
sell more
than shares
in connection with this offering. To the extent that this option
is exercised, each underwriter will be obligated, subject to
certain conditions, to purchase its pro rata portion of these
additional shares based on the underwriter’s underwriting
commitment in the offering as indicated in the table at the
beginning of this “Underwriting” section.
Lock-Up Agreements
We, all of our directors and executive officers, our
stockholder, and the holders of substantially all of our
outstanding stock options have agreed that, subject to certain
exceptions negotiated between the underwriters and us, without
the prior written consent of each of Lehman Brothers and Merrill
Lynch, we and they will not, directly or indirectly,
(1) offer for sale, sell, contract to sell, sell any option
or contract to purchase, purchase any option or contract to
sell, grant any options, right or warrant to purchase, pledge or
otherwise dispose of any shares of Class A common stock or
securities convertible into or exercisable or exchangeable for
Class A common stock (including, without limitation, shares
of Class A common stock that may be deemed to be
beneficially owned in accordance with the rules and regulations
of the SEC and shares of Class A common stock that may be
issued upon exercise of any options or warrants), (2) enter
into any swap or other derivatives transaction that transfers to
another, in whole or in part, any of the economic consequences
of ownership of the Class A common stock, or (3) make
any demand for or exercise any right or cause to be filed a
registration statement, including any amendments thereto, with
respect to the registration of any shares of Class A common
stock or securities convertible into or exercisable or
exchangeable for Class A common stock or any of our other
securities.
The 180-day restricted
period described in the preceding paragraph will be extended if:
•
during the last 17 days of the
180-day restricted
period we issue an earnings release or material news or a
material event relating to us occurs; or
•
prior to the expiration of the
180-day restricted
period, we announce that we will release earnings results during
the 16-day period
beginning on the last day of the
180-day period,
in which case the restrictions described in the preceding
paragraph will continue to apply until the expiration of the
18-day period beginning
on the issuance of the earnings release or the announcement of
the material news or occurrence of the material event.
Lehman Brothers and Merrill Lynch, jointly in their sole
discretion, may release the Class A common stock and other
securities subject to the
lock-up agreements
described above in whole or in part at any time with or without
notice. When determining whether or not to release Class A
common stock and other securities from
lock-up agreements,
Lehman Brothers and Merrill Lynch will consider, among other
factors, the holder’s reasons for requesting the release,
the number of shares of Class A common stock and other
securities for which the release is being requested and market
conditions at the time.
Offering Price Determination
Prior to this offering, there has been no public market for our
common stock. The initial public offering price will be
negotiated among the representatives, the selling stockholders
and us. Among the factors to be considered in determining the
initial public offering price will be:
•
the history and prospects for the industry in which we compete;
•
our financial information;
•
the ability of our management and our business potential and
earning prospects;
the prevailing securities markets at the time of this
offering; and
•
the recent market prices of, and the demand for, publicly traded
shares of generally comparable companies.
Indemnification
We and the selling stockholders have agreed to indemnify the
underwriters against certain liabilities, including liabilities
under the Securities Act and liabilities incurred in connection
with the directed share program referred to below, and to
contribute to payments that the underwriters may be required to
make for these liabilities.
Directed Share Program
At our request, the underwriters have reserved for sale at the
initial public offering price up
to shares
offered hereby for officers, directors, employees and certain
other persons associated with us. The number of shares available
for sale to the general public will be reduced to the extent
these persons purchase these reserved shares. Any reserved
shares not so purchased will be offered by the underwriters to
the general public on the same basis as the other shares offered
hereby.
Stabilization, Short Positions and Penalty Bids
The representatives may engage in stabilizing transactions,
short sales and purchases to cover positions created by short
sales, and penalty bids or purchases for the purpose of pegging,
fixing or maintaining the price of the Class A common
stock, in accordance with Regulation M under the Securities
Exchange Act of 1934:
•
Stabilizing transactions permit bids to purchase the underlying
security so long as the stabilizing bids do not exceed a
specified maximum.
•
A short position involves a sale by the underwriters of shares
in excess of the number of shares the underwriters are obligated
to purchase in the offering, which creates the syndicate short
position. This short position may be either a covered short
position or a naked short position. In a covered short position,
the number of shares involved in the sales made by the
underwriters in excess of the number of shares they are
obligated to purchase is not greater than the number of shares
that they may purchase by exercising their option to purchase
additional shares. In a naked short position, the number of
shares involved is greater than the number of shares in their
option to purchase additional shares. The underwriters may close
out any short position by either exercising their option to
purchase additional shares and/or purchasing shares in the open
market. In determining the source of shares to close out the
short position, the underwriters will consider, among other
things, the price of shares available for purchase in the open
market as compared to the price at which they may purchase
shares through their option to purchase additional shares. A
naked short position is more likely to be created if the
underwriters are concerned that there could be downward pressure
on the price of the shares in the open market after pricing that
could adversely affect investors who purchase in the offering.
•
Syndicate covering transactions involve purchases of the
Class A common stock in the open market after the
distribution has been completed in order to cover syndicate
short positions.
•
Penalty bids permit the representatives to reclaim a selling
concession from a syndicate member when the Class A common
stock originally sold by the syndicate member is purchased in a
stabilizing or syndicate covering transaction to cover syndicate
short positions.
These stabilizing transactions, syndicate covering transactions
and penalty bids may have the effect of raising or maintaining
the market price of our Class A common stock or preventing
or retarding a decline in the market price of the Class A
common stock. As a result, the price of the Class A common
stock may be higher than the price that might otherwise exist in
the open market. These transactions may be effected on The
Nasdaq Stock Market or otherwise and, if commenced, may be
discontinued at any time.
Neither we, the selling stockholders nor any of the underwriters
make any representation or prediction as to the direction or
magnitude of any effect that the transactions described above
may have on the price of the Class A common stock. In
addition, neither we, the selling stockholders nor any of the
underwriters make any representation that the representatives
will engage in these stabilizing transactions or that any
transaction, once commenced, will not be discontinued without
notice.
Electronic Distribution
A prospectus in electronic format may be made available on the
Internet sites or through other online services maintained by
one or more of the underwriters and/or selling group members
participating in this offering, or by their affiliates. In those
cases, prospective investors may view offering terms online and,
depending upon the particular underwriter or selling group
member, prospective investors may be allowed to place orders
online. The underwriters may agree with us to allocate a
specific number of shares for sale to online brokerage account
holders. Any such allocation for online distributions will be
made by the representatives on the same basis as other
allocations.
Other than the prospectus in electronic format, the information
on any underwriter’s or selling group member’s web
site and any information contained in any other web site
maintained by an underwriter or selling group member is not part
of the prospectus or the registration statement of which this
prospectus forms a part, has not been approved and/or endorsed
by us, the selling stockholders or any underwriter or selling
group member in its capacity as underwriter or selling group
member and should not be relied upon by investors.
Nasdaq Stock Market
We have applied to list our shares of Class A common stock
for quotation on the Nasdaq National Market under the symbol
“DADY.”
Discretionary Sales
The underwriters have informed us that they do not intend to
confirm sales to discretionary accounts that exceed 5% of the
total number of shares offered by them.
Stamp Taxes
If you purchase shares of Class A common stock offered in
this prospectus, you may be required to pay stamp taxes and
other charges under the laws and practices of the country of
purchase, in addition to the offering price listed on the cover
page of this prospectus.
Relationships
The underwriters may in the future perform investment banking
and advisory services for us from time to time for which they
may in the future receive customary fees and expenses.
The validity of our Class A common stock offered by this
prospectus will be passed upon for us by Wilson Sonsini
Goodrich & Rosati, Professional Corporation, Palo Alto,
California. Certain legal matters in connection with this
offering will be passed upon for the underwriters by
Fenwick & West LLP, Mountain View, California.
EXPERTS
The consolidated financial statements of The Go Daddy Group,
Inc. at December 31, 2004 and 2005, and for each of the
three years in the period ended December 31, 2005,
appearing in this Prospectus and Registration Statement have
been audited by Ernst & Young LLP, an independent
registered public accounting firm, as set forth in their report
thereon appearing elsewhere herein, and are included in reliance
upon such report given on the authority of such firm as experts
in accounting and auditing.
WHERE YOU CAN FIND ADDITIONAL INFORMATION
We have filed with the SEC a registration statement on
Form S-1 under the
Securities Act with respect to the shares of our Class A
common stock offered hereby. This prospectus does not contain
all of the information set forth in the registration statement
and the exhibits thereto. Some items are omitted in accordance
with the rules and regulations of the SEC. For further
information with respect to us and the Class A common stock
offered hereby, we refer you to the registration statement and
the exhibits thereto. Statements contained in this prospectus as
to the contents of any contract, agreement or any other document
are summaries of the material terms of that contract, agreement
or other document. With respect to each of these contracts,
agreements or other documents filed as an exhibit to the
registration statement, we refer you to the exhibits for a more
complete description of the matter involved. A copy of the
registration statement, and the exhibits thereto, may be
inspected without charge at the public reference facilities
maintained by the SEC at 100 F Street, N.E., Room 1580,
Washington, D.C. 20549. Copies of these materials may be
obtained from this office upon payment of the prescribed fees.
Please call the SEC at
1-800-SEC-0330 for
further information on the operation of the public reference
facility. The SEC maintains a web site that contains reports,
proxy and information statements, and other information
regarding issuers, like us, that file electronically with the
SEC. The address of the SEC’s website is www.sec.gov.
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholder of
The Go Daddy Group, Inc.
We have audited the accompanying consolidated balance sheets of
The Go Daddy Group, Inc. (a subchapter S Corporation) as of
December 31, 2004 and 2005 and the related consolidated
statements of operations, stockholder’s deficit, and cash
flows for each of the three years in the period ended
December 31, 2005. These consolidated financial statements
are the responsibility of the Company’s management. Our
responsibility is to express an opinion on these consolidated
financial statements based upon our audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. We were not engaged to perform an
audit of the Company’s internal control over financial
reporting. Our audits included consideration of internal control
over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not
for the purpose of expressing an opinion on the effectiveness of
the Company’s internal control over financial reporting.
Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by
management, and evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable
basis for our opinion.
In our opinion, the consolidated financial statements referred
to above present fairly, in all material respects, the
consolidated financial position of The Go Daddy Group, Inc. at
December 31, 2004 and 2005, and the consolidated results of
its operations and its cash flows for each of the three years in
the period ended December 31, 2005, in conformity with
U.S. generally accepted accounting principles.
The consolidated financial statements include the accounts and
operations of The Go Daddy Group, Inc. and its wholly owned
subsidiaries (“the Company”). The Company does not
have any subsidiaries in which it does not own 100% of the
outstanding stock. All significant intercompany accounts and
transactions have been eliminated in consolidation. The Company
provides a variety of domain name registration and website
hosting services as well as a broad array of on-demand and other
services.
2.
Summary of Significant Accounting Policies
Cash and Cash Equivalents
The Company considers all investments purchased with a remaining
maturity of three months or less at the date of acquisition to
be cash equivalents. The Company had pledged $50 of its cash
equivalents as collateral against outstanding letters of credit
at December 31, 2004 and 2005. This cash is shown as
restricted cash on the consolidated balance sheets.
Short-Term Investments
Short-term investments consist of corporate and government
agency debt securities and bank time deposits. Management
classifies the Company’s short-term investments as
available-for-sale. Available-for-sale securities are carried at
fair value with the unrealized gains and losses reported in
stockholder’s deficit. Realized gains and losses and
declines in value judged to be other than temporary, if any, are
included in operations. A decline in the market value of any
available-for-sale security below cost that is deemed other than
temporary results in an impairment of fair value. Any deemed
impairment is charged to earnings and a new cost basis for the
security is established. Premiums and discounts are amortized or
accreted over the life of the related available-for-sale
security. Dividend and interest income are recognized when
earned. The cost of securities sold is calculated using the
specific identification method.
Accounts Receivable
Accounts receivable are carried at the outstanding balances less
an allowance for doubtful accounts. The Company considers
accounts receivable to be fully collectible; therefore, the
allowance for doubtful accounts is zero at December 31,2004 and 2005.
Registry Deposits
Registry deposits represent amounts paid by the Company to
registries for future domain name registrations.
Prepaid Domain Name Registry Fees
Prepaid domain name registry fees represent amounts paid by the
Company to registries for domain names registered by the
Company’s customers. The Company amortizes prepaid domain
name registry fees for initial registrations and renewals on a
straight-line basis over the term of the registration contract,
ranging from one to ten years. Under certain circumstances,
renewal registrations have a term of between one and eleven
months.
Notes to Consolidated Financial
Statements — (Continued)
(In thousands, except share and per share data)
Property and
Equipment
Property and equipment are stated at cost. Depreciation and
amortization is charged to operations over the estimated useful
lives of the applicable assets, using the straight-line method.
The estimated useful lives are as follows:
Computer equipment
2-5 years
Building
25 years
Software
3 years
Furniture and fixtures
7-10 years
Other depreciable property
5-10 years
Maintenance and repairs are charged to expense as incurred;
major renewals and betterments are capitalized. Leasehold
improvements are amortized over the shorter of seven years or
the remaining life of the lease. When items of property or
equipment are sold or retired, the related cost and accumulated
depreciation are removed from the accounts and any gain or loss
is included in income. Depreciation and amortization expenses
for the years ended December 31, 2003, 2004 and 2005 were
$1,384, $2,780 and $7,784, respectively.
Long-Lived Assets
The Company reviews its long-lived assets for impairment
annually and whenever events or circumstances indicate that the
carrying amount of an asset may not be fully recoverable. The
Company recognizes an impairment loss if the sum of the expected
long-term undiscounted cash flows that the long-lived asset is
expected to generate is less than the carrying amount of the
long-lived asset being evaluated. The Company treats any
write-downs as permanent reductions in the carrying amount of
the assets. The Company believes the carrying values of its
assets at December 31, 2004 and 2005 are fully realizable.
Deferred Rent and Lease
Accounting
The Company leases certain office space in various locations. At
the inception of each lease, the Company evaluates the property
to determine whether the lease will be accounted for as an
operating or a capital lease. The term of the lease used for
this evaluation includes renewal option periods only in
instances where the exercise of the renewal option can be
reasonably assured and failure to exercise the option would
result in an economic penalty.
The Company records tenant improvement allowances granted under
the lease agreements as leasehold improvements within property
and equipment and within deferred rent.
For leases that contain rent escalations, the Company records
the total rent payable during the lease term, as determined
above, on a straight-line basis over the term of the lease
(including any “rent holiday” period beginning upon
possession of the premises), and records the difference between
the rent paid and the straight-line rent as deferred rent.
Revenue Recognition
The Company’s revenue recognition policy is consistent with
applicable revenue recognition guidance and interpretations,
including the requirements of Staff Accounting
Bulletin No. 104, Revenue Recognition, Emerging
Issues Task Force Issue
No. 00-21,
Revenue Arrangements with Multiple Deliverables, and
Statement of Position 97-2, Software Revenue Recognition.
The Company records revenue when all four of the following
criteria are met: (1) there is persuasive evidence that an
arrangement exists; (2) delivery of the services has
occurred; (3) the selling price is fixed or
Notes to Consolidated Financial
Statements — (Continued)
(In thousands, except share and per share data)
determinable; and (4) collectibility is reasonably assured.
The Company records the cash received in advance of revenue
recognition as deferred revenue.
The Company’s agreements do not contain general rights of
return. The Company reserves for payment card chargebacks and
certain other refunds based on its historical experience. The
Company records reserves as a reduction to revenue.
The Company evaluates revenue arrangements with multiple
deliverables to determine if the deliverables (items) can
be divided into more than one unit of accounting. An item can
generally be considered a separate unit of accounting if all of
the following criteria are met:
•
the delivered item has value to the customer on a stand-alone
basis;
•
there is objective and reliable evidence of the fair value of
the undelivered item; and
•
if the arrangement includes a general right of return relative
to the delivered item, delivery or performance of the
undelivered item is considered probable and substantially in the
control of the Company.
Items that do not meet these criteria are combined into a single
unit of accounting. If there is objective and reliable evidence
of fair value for all units of accounting, the Company allocates
the arrangement consideration to the separate units of
accounting based on their relative fair values. The Company
records revenue from these units in the appropriate revenue line
item in its consolidated statements of operations. In cases
where the selling price allocated to an individual unit is less
than the Company’s cost of the unit, the Company
immediately records a loss for the amount by which the cost
exceeds the revenue allocated to the unit recorded. In the event
objective and reliable evidence of the fair value(s) of the
undelivered item(s) did not exist, the Company would defer all
revenue for the arrangement and recognize it over the period in
which the last item is delivered.
Domain Name Registration. Domain name registration
revenue consists of domain name registrations, renewals and
transfers, domain name privacy, domain name application fees,
domain name back-orders and fee surcharges paid to the Internet
Corporation for Assigned Names and Numbers (“ICANN”).
The domain name registration contractsthe Company enters into
with customers have a term of between one and ten years, and a
majority of its customers enter into contracts having a one-year
term. Under certain circumstances, renewal registrations have a
term of between one and eleven months. Except for arrangements
the Company has with a small number of large enterprises with
which the Company has negotiated alternative arrangements, all
of its customers pay for registrations in full at the time a
domain name is registered. Domain name registration fees are
non-refundable, and the Company records them as deferred revenue
in the accompanying consolidated balance sheets. The Company
then recognizes revenue ratably on a daily basis over the term
of the contract.
Website Hosting.The Company generates website hosting
revenue through the sale of website hosting services. Website
hosting is most frequently purchased on an annual basis but is
also available on a monthly basis or for longer periods. The
fees the Company charges for website hosting services differ
based on the type of hosting plan purchased and the amount of
data storage, bandwidth and other services included. The Company
records website hosting revenue as deferred revenue at the time
of sale and recognizes it ratably on a daily basis over the term
of the contract.
On-Demand Services and Other Revenue.The Company’s
on-demand services currently include online shopping cart,
hosted website building service, email accounts, search engine
optimization service, email marketing service, and fax thru
email service. The Company generally sells its on-demand
services on an annual or a monthly basis, depending on the
service. The Company records revenue from on-demand services as
deferred revenue when paid and recognizes it ratably on a daily
basis over the term of the contract.
Notes to Consolidated Financial
Statements — (Continued)
(In thousands, except share and per share data)
Other revenue sources include the sale of Secure Sockets Layer
(SSL) certificates for secure online transacting, domain name
appraisal and auction service, enrollment fees paid to the
Company by its resellers, and advertising on “parked
pages.” Parked pages are domain names registered with the
Company that do not yet contain an active website. Revenues from
these services are recognized immediately upon completion of the
service, ratably over the term of the service contract or, in
the case of advertising, on a per-click basis.
Research and Development and
Software Development Costs
The Company charges research and development costs, other than
certain software development costs, to expense as incurred.
Software development costs incurred subsequent to the
establishment of technological feasibility and prior to the
general release of a service to the public are capitalized and
amortized to cost of revenue over the estimated useful life of
the related service. There were no costs capitalized at
December 31, 2004 and 2005 because the costs incurred from
technological feasibility to the general release were immaterial.
Share-Based
Compensation
Variable Stock Option Plan.The Company accounts for
employee stock options granted prior to December 31, 2005
pursuant to Accounting Principles Board Opinion No. 25
(“APB 25”), Accounting for Stock Issued to
Employees, and related interpretations, and has adopted the
disclosure-only alternative of Statement of Financial Accounting
Standards (“SFAS”) No. 123, Accounting
for Stock-Based Compensation
(“SFAS No. 123”) and
SFAS No. 148, Accounting for Stock Based
Compensation — Transition and Disclosures. The
Company grants stock options to employees with exercise prices
equal to the value of the underlying stock, as determined by its
Board of Directors on the date the option is granted. Its Board
of Directors determined the value of the underlying stock by
considering a number of factors, including operating cash flows,
the risks the Company faced at the time, and the lack of
liquidity of the Company’s common stock. The stock options
vest 25% per year beginning one year after the grant date,
and expire ten years from the date of grant; however, the
options are not exercisable prior to the occurrence of the sale
of the Company or the common stock of the Company being listed
and publicly traded on any stock exchange within the United
States. As a result of the lack of exercisability, the stock
options outstanding are considered to be variable awards and the
measurement date will only occur when exercise of the options
becomes probable. At December 31, 2005, the exercisability
of the Company’s stock options had not yet been deemed
probable and as a result no compensation expense has been
recorded.
Based on the fair value of the Company’s common stock of
$11.64 at December 31, 2005, the amount of unrecognized
compensation expense resulting from the Company’s
outstanding stock options would be approximately
$61.6 million. In addition, the amount of unrecognized
compensation expense related to vested options at
December 31, 2005 would be approximately
$56.5 million. This fair value was based upon a
retrospective third-party valuation analysis and is inherently
uncertain and highly subjective.
SFAS No. 123. The information below has been
determined as if the Company had accounted for stock-based
awards under the fair value method prescribed in
SFAS No. 123. The fair value of the Company’s
options to purchase common stock was estimated at the date of
grant using the minimum value pricing model for 2003, 2004 and
2005. The fair value of stock-based awards was estimated using
the following weighted average assumptions for December 31:
Notes to Consolidated Financial
Statements — (Continued)
(In thousands, except share and per share data)
Using the minimum value pricing model, the estimated weighted
average fair value of an option to purchase one share of common
stock granted during 2003, 2004 and 2005 was $0.37, $0.62 and
$2.35 per option, respectively. As the Company’s
options are not exercisable prior to the occurrence of the sale
of the Company or the common stock of the Company being listed
and publicly traded on any stock exchange within the United
States, there would be no compensation expense recognized until
exercisability of the Company’s stock options has been
deemed probable.
Based on the minimum value pricing model, the amount of pro
forma unrecognized compensation expense resulting from the
Company’s outstanding stock options at December 31,2005 would have been approximately $2,958. For the purposes of
pro forma disclosures, the estimated fair value of stock options
is amortized to expense primarily over the vesting period using
the accelerated expense attribution method under FASB
Interpretation No. 28, Accounting for Stock Appreciation
Rights and Other Variable Stock Option Award Plans.
SFAS 123 (Revised 2004). In December 2004, the
Financial Accounting Standards Board (“FASB”) issued
SFAS 123 (Revised 2004), Share-Based Payment
(“SFAS No. 123R”), which replaces
SFAS 123 and supersedes APB 25. The Company is
required to adopt SFAS No. 123R for the fiscal year
commencing January 1, 2006. SFAS No. 123R
requires measurement of all employee share-based compensation
awards using a fair-value method and recording of this expense
in the consolidated financial statements. The Company selected
the
Black-Scholes-Merton
option pricing model as the most appropriate method for
estimating the fair value of share-based awards. The
Black-Scholes-Merton
option pricing model requires the Company to make certain
assumptions, including stock price volatility, estimated
forfeitures, employee stock option exercise behavior and other
factors, that can be highly subjective and difficult to predict.
A change in one or more of these assumptions could have a
material impact on total share-based compensation expense.
SFAS No. 123R requires share-based compensation
expense to be recognized in the Company’s statement of
operations over the service period of the share-based award,
typically the vesting period. The Company is required to adopt
SFAS No. 123R under the prospective method, in which
nonpublic entities that previously applied
SFAS No. 123 using the minimum-value method (whether
for financial statement recognition or pro forma disclosure
purposes), would continue to account for nonvested stock options
outstanding at the date of adoption of SFAS No. 123R
in the same manner as they had been accounted for prior to
adoption. That is, since the Company was accounting for stock
options using the intrinsic-value method under APB 25, it
will continue to apply APB 25 in future periods to stock options
outstanding at January 1, 2006.
Derivative Financial
Instruments
The Company does not acquire, hold or issue derivative financial
instruments for trading purposes. Derivative financial
instruments are used to manage interest rate risks that arise
out of the Company’s core business activities.
The Company has one derivative financial instrument in the form
of an interest rate swap to manage interest rate risk. The
Company recognizes all changes in the fair value of derivatives
in its consolidated statements of operations. The fair value of
derivatives is determined through the use of independent markets
and is based upon the prevailing market prices of those
instruments at the date of valuation.
Income Taxes
The Company has elected to be taxed under the Internal Revenue
Code as a subchapter S corporation. Under those provisions,
the Company does not pay corporate income taxes on its taxable
income. Instead, the stockholder is liable for federal and state
income taxes on the taxable income of the Company.
Notes to Consolidated Financial
Statements — (Continued)
(In thousands, except share and per share data)
Advertising Costs
Advertising costs other than direct-response advertising are
expensed at the time the promotion first appears in the media.
The Company capitalizes the direct costs of producing and
distributing
direct-response
advertisements mailed by the Company or through third parties
and amortizes the costs over the expected future revenue stream,
which is generally three months from the date the advertisements
are mailed. Capitalized direct-response advertising costs of
$244 at December 31, 2005 are included in prepaid expenses
in the consolidated balance sheets. Advertising expense amounted
to approximately $1,073, $2,533 and $12,534 for the years ended
December 31, 2003, 2004 and 2005, respectively.
Fair Value of Financial
Instruments
The carrying amounts of cash and cash equivalents approximate
fair value due to the short maturity of those instruments. The
respective fair values of investments are determined based on
quoted market prices, which approximate fair values. The
carrying amounts of accounts receivable, accounts payable and
accrued liabilities reported in the consolidated balance sheets
approximate their fair values because of the immediate or
short-term maturity of these financial instruments. Based on
borrowing rates currently available to the Company for loans
with similar terms, the carrying values of the Company’s
long-term debt also approximate fair value. The fair value of
derivative instruments is based on quotes from brokers using
market prices for those or similar instruments.
Use of Estimates
The preparation of financial statements in conformity with U.S.
generally accepted accounting principles requires management to
make estimates and assumptions that affect the amounts reported
in the consolidated financial statements and accompanying notes.
Actual results could differ from those estimates.
Concentrations of Credit
Risk
The majority of the Company’s accounts receivable at
December 31, 2004 and 2005 are comprised of amounts due
from payment card processors and online payment services. There
are no amounts 90 days or more past due. The Company has
not experienced any losses on these accounts and believes it is
not exposed to any significant credit risk on its accounts
receivable balances.
Recently Issued Accounting
Pronouncements
In March 2005, the SEC issued Staff Accounting Bulletin
No. 107,
Share-Based
Payment (“SAB No. 107”).
SAB No. 107 provides guidance regarding the
interaction between SFAS No. 123R and certain SEC
rules and regulations, including guidance related to valuation
methods, the classification of compensation expense,
non-GAAP financial
measures, the accounting for income tax effects of
share-based payment
arrangements, disclosures in management’s discussion and
analysis of financial condition and results of operations
subsequent to adoption of SFAS No. 123R and
modifications of options prior to the adoption of
SFAS No. 123R.
In May 2005, the FASB issued SFAS No. 154,
Accounting Changes and Error Corrections — A
Replacement of APB Opinion No. 20 and FASB Statement
No. 3. SFAS No. 154 requires the
retrospective application to prior periods’ financial
statements of changes in accounting principle, unless it is
impractical to determine either the period-specific effects or
cumulative effect of the accounting change.
SFAS No. 154 also requires that a change in
depreciation, amortization or depletion method for long-lived
non-financial assets be accounted for as a change in accounting
estimate affected by a change in accounting principle.
SFAS No. 154
Notes to Consolidated Financial
Statements — (Continued)
(In thousands, except share and per share data)
is effective for accounting changes and corrections of errors
made in fiscal years beginning after December 15, 2005, and
the Company will adopt this provision, as applicable, in 2006.
In November 2005, the FASB issued FASB Staff Position 115-1
and FAS 124-1, The Meaning of Other-Than-Temporary
Impairment and Its Application to Certain Investments
(“FSP 115-1”),
which provides guidance on determining when investments in
certain debt and equity securities are considered impaired,
determining whether that impairment is other-than-temporary, and
measuring that impairment loss.
FSP 115-1 also
includes accounting considerations subsequent to the recognition
of other-than-temporary impairment and requires certain
disclosures about unrealized losses that have not been
recognized as other-than-temporary impairments. FSP 115-1 is
required to be applied to reporting periods beginning after
December 15, 2005 and is required to be adopted by the
Company in the first quarter of fiscal 2006. The Company is
currently evaluating the effect that the adoption of FSP 115-1
will have on its consolidated results of operations and
financial condition but does not expect it to have a material
impact on its consolidated results of operations.
3.
Short-Term Investments
The Company’s short-term investments are intended to
establish a high-quality portfolio that preserves principal,
meets liquidity needs, avoids inappropriate concentrations and
delivers an appropriate yield in relation to the Company’s
investment guidelines and market conditions. Short-term
investments consist of government agency bonds, municipal debt
securities, other debt securities and bank time deposits. The
following is a summary of available-for-sale securities at
December 31, 2004:
Gross
Gross
Estimated
Adjusted
Unrealized
Unrealized
Fair
Cost
Gains
Losses
Value
Government agency bonds
$
2,000
$
—
$
(77
)
$
1,923
Municipal debt securities
325
—
—
325
Other debt securities
725
—
—
725
Bank time deposits
200
—
—
200
$
3,250
$
—
$
(77
)
$
3,173
The following is a summary of available-for-sale securities at
December 31, 2005:
Gross
Gross
Estimated
Adjusted
Unrealized
Unrealized
Fair
Cost
Gains
Losses
Value
Government agency bonds
$
2,000
$
—
$
(124
)
$
1,876
Municipal debt securities
425
—
—
425
Other debt securities
725
—
—
725
$
3,150
$
—
$
(124
)
$
3,026
The Company’s unrealized losses of $124 at
December 31, 2005 were due to fluctuations in interest
rates. Management does not believe any of the unrealized losses
represented an other-than-temporary impairment based on its
evaluation of available evidence at December 31, 2005.
During the years ended December 31, 2003, 2004 and 2005,
the Company did not have any realized gains or losses on sales
of available-for-sale securities.
The unamortized cost and estimated fair value of the
available-for-sale securities at December 31, 2005, by
maturity, are shown below. Expected maturities can differ from
contractual maturities because the issuers
Notes to Consolidated Financial
Statements — (Continued)
(In thousands, except share and per share data)
of the securities may have the right to prepay obligations
without prepayment penalties, and the Company views its
available-for-sale securities as available for current
operations.
Gross
Gross
Estimated
Unrealized
Unrealized
Fair
Cost
Gains
Losses
Value
Due in one year or less
$
200
$
—
$
—
$
200
Due after one year and through five years
2,000
—
124
1,876
Due after five years and through ten years
—
—
—
—
Due after ten years
950
—
—
950
$
3,150
$
—
$
124
$
3,026
4.
Property and Equipment
Property and equipment consisted of the following at
December 31:
2004
2005
Computer equipment
$
12,313
$
30,324
Building
—
9,559
Software
1,362
2,707
Leasehold improvements
1,040
3,070
Furniture and fixtures
465
788
Other depreciable property
483
579
Total property and equipment
15,663
47,027
Accumulated depreciation and amortization
(4,695
)
(11,880
)
Property and equipment, net
$
10,968
$
35,147
In 2005, the Company acquired a building for approximately
$9,500. The Company plans to utilize this building as the
primary data center to support its website hosting activities
and corporate infrastructure. The building had not yet been
placed into service at December 31, 2005.
5.
Stockholder’s Equity
At December 31, 2002, the Company had authorized
50,000,000 shares of its $.01 par value common stock,
18,300,828 shares of which were issued and outstanding. On
December 31, 2004, the Company announced a two-for-one
stock split in the form of a stock dividend. Under the terms of
the stock split, the Company’s stockholder of record on
that date received one share of common stock for every one share
of common stock held on that date. The stock split was effected
on December 31, 2004 from authorized but unissued shares of
common stock of the Company. The number of shares of the
Company’s common stock, per share amounts and stock option
data have been retroactively restated for all periods presented
for the stock split discussed above.
Since the Company’s inception in 1997, the Company has
operated as a subchapter S corporation and income has been
taxed directly to the Company’s sole stockholder. Since
2002, the Company has made regular distributions to this
stockholder based on the funds available for distribution. In
2003, 2004, and 2005 the Company made distributions to this
stockholder aggregating approximately $605, $5,114, and $4,804.
Notes to Consolidated Financial
Statements — (Continued)
(In thousands, except share and per share data)
6.
Stock Option Plans
During 2002, the Company’s Board of Directors and
stockholder approved the Go Daddy Group 2002 Stock Option Plan
(the “Plan”), which provides for the issuance of
nonqualified stock options to employees. The Company had
reserved 6,700,000 shares of the Company’s common
stock for grants under this Plan, of which 357,100 remained
available for grant at December 31, 2005. The Plan is
administered by a committee appointed by the Board of Directors,
which is authorized to, among other things, select the employees
who will receive grants and determine the exercise price and
vesting period for the options.
On October 20, 2005, the Company entered into change of
control agreements with certain officers of the Company that
modified their stock option agreements. The modification
provides that: (i) upon the occurrence of a change of
control transaction involving the Company, all unvested stock
options held by the officer will become 100% vested and
exercisable, and (ii) if the Company’s founder retains
at least a 50% interest in the Company as of the date of an
initial public offering, then 50% of the unvested shares
underlying options held by the officer will become vested and
exercisable on that date.
Summary information related to the stock option plans is as
follows:
Weighted average fair value of options granted during the year
2.35
The following tables summarize information about stock-based
employee compensation grants outstanding and vested at
December 31, 2004 and 2005. The options are not exercisable
prior to the occurrence of the sale of the Company or the common
stock of the Company being listed and publicly traded on any
stock exchange within the United States. As a result of the lack
of exercisability, the stock options
Notes to Consolidated Financial
Statements — (Continued)
(In thousands, except share and per share data)
outstanding are considered to be variable awards and the
measurement date will only occur when exercise of the options
becomes probable. At December 31, 2005, the exercisability
of the Company’s stock options had not yet been deemed
probable and as a result no compensation expense has been
recorded.
2004 Outstanding Options
2004 Vested Options
Weighted
Weighted
Weighted
Weighted
Average
Average
Average
Average
Number of
Contractual
Exercise
Number of
Contractual
Exercise
Exercise Price
Shares
Life
Price
Shares
Life
Price
(In years)
(In years)
$0.25 - $0.60
3,774,600
4.30
$
0.32
3,589,650
4.18
$
0.30
$1.13 - $1.38
827,000
7.12
1.20
519,400
7.07
1.19
$1.91 - $2.46
624,800
8.62
2.40
173,000
8.55
2.35
$3.79 - $4.02
586,000
9.50
3.95
17,150
8.84
3.80
5,812,400
4,299,200
2005 Outstanding Options
2005 Vested Options
Weighted
Weighted
Weighted
Weighted
Average
Average
Average
Average
Number of
Contractual
Exercise
Number of
Contractual
Exercise
Exercise Price
Shares
Life
Price
Shares
Life
Price
(In years)
(In years)
$0.25 - $0.60
3,514,200
4.62
$
0.31
3,514,200
4.62
$
0.31
$1.13 - $1.38
829,400
6.10
1.20
732,600
6.07
1.19
$1.91 - $2.46
614,000
7.64
2.40
317,700
7.61
2.39
$3.79 - $4.02
555,900
8.52
3.95
153,900
8.45
3.94
$5.87
32,600
9.13
5.87
—
—
—
$7.69
668,300
9.70
7.69
—
—
—
$9.10
128,500
9.92
9.10
—
—
—
6,342,900
4,718,400
7.
Long-Term Debt
In October 2005, the Company obtained a $7.1 million loan
from U.S. Bank to finance the purchase of a building to be
used as a data center. The loan bears interest at a rate of
2.10% plus one month LIBOR. The Company entered into an interest
rate swap agreement to fix the effective interest rate at 6.98%.
The interest rate swap agreement expires October 18, 2010.
The Company is exposed to credit loss in the event of
non-performance by the counterparty to the interest rate swap
agreement. However, the Company does not anticipate
nonperformance by the counterparty.
In October 2005, the Company also entered into a $1,500 credit
facility with U.S. Bank for the purchase of data center
equipment. Any borrowing under the credit facility would bear
interest at the prime rate announced by U.S. Bank until
July 31, 2006 and thereafter at the rate of 2.10% plus one
month LIBOR. As of December 31, 2005, there were no
balances outstanding under this facility.
The Company is not in compliance with one of its covenants
related to its
long-term debt, due to
the issuance of financial statements after the date required
under the terms of the covenant. The bank has issued the Company
a waiver related to this covenant.
The Company leases office space and vehicles under operating
leases expiring at various dates through August 2008. Total rent
expense for the years ended December 31, 2003, 2004 and
2005 was $645, $1,421 and $3,015, respectively.
Future minimum lease payments required under all operating lease
agreements are as follows:
The Company has entered into long-term maintenance arrangements
with certain vendors to provide maintenance of equipment. Under
these arrangements, the Company is required to make monthly
payments totaling approximately $94 through May 2008. Minimum
payments under these agreements total $1,132 in 2006, $1,132 in
2007 and $209 in 2008.
Litigation
The Company is subject to various legal proceedings and claims,
either asserted or unasserted, which arise in the ordinary
course of business. While the outcome of these claims cannot be
predicted with certainty, management does not believe that the
outcome of any of these matters will have a material adverse
effect on the Company’s business, financial position,
results of operations or cash flows.
Notes to Consolidated Financial
Statements — (Continued)
(In thousands, except share and per share data)
Legal Settlement
In 2005, the Company recorded other income of $2,000 from the
settlement of a legal dispute involving breach of contract by a
third party.
Indemnification
The Company has agreed to indemnify its directors and executive
officers for costs associated with any fees, expenses,
judgments, fines and settlement amounts incurred by them in any
action or proceeding to which any of them is, or is threatened
to be, made a party by reason of his service as a director or
officer, including any action by the Company, arising out of his
services as the Company’s director or officer or his
services provided to any other company or enterprise at the
Company’s request.
Other
The Company is responsible for charging end customers certain
taxes in numerous international jurisdictions. In the ordinary
course of its business, there are many transactions and
calculations where the ultimate tax determination is uncertain.
In the future, the Company may come under audit, which could
result in changes to its tax estimates. The Company believes
that it maintains adequate tax reserves to offset the potential
liabilities that may arise upon audit. Although the Company
believes its tax estimates and associated reserves are
reasonable, the final determination of tax audits and any
related litigation could be materially different than the
amounts established for tax contingencies. To the extent that
these estimates ultimately prove to be inaccurate, the
associated reserves would be adjusted resulting in the
Company’s recording a benefit or expense in the period in
which a final determination is made.
9.
Benefit Plan
The Company has a defined contribution plan (401(k) plan)
covering all employees who meet certain eligibility
requirements. Eligible employees may contribute up to 15% of
their respective compensation subject to limitations established
by the Internal Revenue Code. The Company may match 50% of any
participant’s contribution up to $4 of the
participant’s compensation. Participants are immediately
vested in their contributions plus actual earnings thereon.
Participants become 20% vested in the Company’s
contributions plus earnings thereon after two years of service
and 20% each year thereafter, becoming 100% vested after six
years of service. The Company’s contribution expense was
$105, $195 and $329 for the years ended December 31, 2003,
2004 and 2005, respectively.
10.
Segment Reporting
The Company’s management approach includes evaluating each
of its over 30 products on which operating decisions are made
based on sales and profitability. Each of its operating
companies sells similar products and services. The Company does
not attempt to allocate marketing and advertising expenses,
general and administrative expenses, and depreciation and
amortization expenses at the product level. Discrete financial
data on each of its services are not available and it would be
impractical to collect and maintain financial data in such a
manner; therefore, reportable segment information is the same as
contained in the Company’s consolidated financial
statements.
11.
Subsequent Events
From January 17, 2006 through March 31, 2006, the
Company granted stock options to purchase an aggregate of
290,000 shares of common stock, each having an exercise
price of $9.10 per share. On May 11,
Notes to Consolidated Financial
Statements — (Continued)
(In thousands, except share and per share data)
2006, the Company granted stock options to purchase an aggregate
of 2,615,196 shares of Class A common stock, each
having an exercise price of $14.52 per share.
On May 11, 2006, the Company’s board of directors:
(i) adopted the 2006 Equity Incentive Plan and reserved
7,000,000 shares of Class A common stock for issuance
thereunder; (ii) approved new change of control agreements
with certain officers of the Company providing for, among other
benefits, payment to each such officer of twelve months of such
officers’ respective base salary and bonus and accelerated
vesting of 50% of any then-unvested stock options granted to
each officer after May 11, 2006, in each case upon the
termination of that officer’s employment without cause or
resignation from his or her office for good reason within
18 months following a change of control of the Company;
(iii) authorized a reincorporation of the Company into
Delaware and institution of a dual-class capital structure; and
(iv) approved the filing of a registration statement on
Form S-1 with the
Securities and Exchange Commission providing for the initial
public offering of the Company’s Class A common stock.
12.
Supplemental Cash Flow Information
At December 31, 2004 and 2005, the Company had recorded
within accounts payable amounts totaling $2,312 and $2,971,
respectively, related to purchases of property and equipment for
which payment had not yet been made.
During 2004, certain of the amounts pledged as collateral
against the Company’s line of credit were released. The
amounts released included $200 of short-term investments.
During 2003, 2004 and 2005, the Company capitalized $264, $211
and $984, respectively, of leasehold improvements, which are
included in property and equipment, through incentives included
in its lease agreements, and resulted in increased deferred rent.
13.
Pro Forma Information (Unaudited)
Income Taxes. Assuming completion of the proposed IPO
(described in Note 11), the Company will revoke its
S corporation status and thereafter will be subject to
corporate federal and state income taxes as a subchapter
C corporation. Because the Company is a subchapter
S corporation, deferred taxes have not been reflected in
the financial statements, and the Company is not responsible for
these income taxes until the revocation of the
S corporation status. The statements of operations do not
include a pro forma adjustment, calculated in accordance with
SFAS No. 109, Accounting for Income Taxes, for
income taxes that would have been recorded if the Company was a
subchapter C corporation because the Company would have
provided a full valuation allowance on its net deferred tax
assets and as such no tax provision would be recorded.
Distributions to Stockholder. The pro forma consolidated
balance sheet as of December 31, 2005 includes an
adjustment to increase stockholder distributions payable and
accumulated deficit by $3.8 million to show the effect of
the S corporation distributions made and expected to be
made in 2006 prior to the Company’s reincorporation and
initial public offering.
The following table sets forth the fees and expenses, other than
underwriting discounts and commissions, payable in connection
with the registration of the Class A common stock
hereunder. All amounts are estimates except the SEC registration
fee, the NASD filing fee and the Nasdaq National Market listing
fee.
Amount to
be paid
SEC registration fee
$
21,400
NASD filing fee
20,500
Nasdaq National Market listing fee
150,000
Legal fees and expenses
*
Accounting fees and expenses
*
Printing and engraving expenses
*
Blue sky fees and expenses
*
Transfer agent and registrar fees
*
Miscellaneous expenses
*
Total
$
*
*
To be completed by amendment.
Item 14.
Indemnification of Directors and Officers
Section 145 of the Delaware General Corporation Law permits
a corporation to include in its charter documents, and in
agreements between the corporation and its directors and
officers, provisions expanding the scope of indemnification
beyond that specifically provided by the current law.
Our amended and restated certificate of incorporation provides
for the indemnification of directors to the fullest extent
permissible under Delaware law.
Our amended and restated bylaws provide for the indemnification
of officers, directors and third parties acting on our behalf if
this person acted in good faith and in a manner reasonably
believed to be in and not opposed to our best interest, and,
with respect to any criminal action or proceeding, the
indemnified party had no reason to believe his or her conduct
was unlawful.
We have entered into indemnification agreements with our
directors and executive officers, in addition to indemnification
provided for in our charter documents, and we intend to enter
into indemnification agreements with any new directors and
executive officers in the future.
The underwriting agreement (Exhibit 1.1 hereto) provides
for indemnification by the underwriters of us, our executive
officers and directors and the selling stockholders, and
indemnification of the underwriters by us and the selling
stockholders for certain liabilities, including liabilities
arising under the Securities Act of 1933, as amended, in
connection with matters specifically provided in writing by the
underwriters for inclusion in the registration statement.
We intend to purchase and maintain insurance on behalf of any
person who is or was a director or officer against any loss
arising from any claim asserted against him or her and incurred
by him or her in that capacity, subject to certain exclusions
and limits of the amount of coverage.
During the last three years, we have issued unregistered
securities to a limited number of persons, as described below:
Since May 2003, we have issued options to purchase an aggregate
of 2,021,600 shares of our Class A common stock under
our Go Daddy 2002 Stock Option Plan to employees with exercise
prices ranging from $1.91 to $9.10 per share, and options
to purchase an aggregate of 2,615,196 shares of our
Class A common stock under our 2006 Equity Incentive Plan
to employees and directors all with exercise prices of $14.52
per share.
None of the foregoing transactions involved any underwriters,
underwriting discounts or commissions, or any public offering.
We believe the offers, sales and issuances of the securities
described above were exempt from registration under the
Securities Act in reliance on Rule 701 because the
transactions were pursuant to compensatory benefit plans or
contracts relating to compensation as provided under such rule
and/or in reliance on Section 4(2) of the Securities Act
because the issuance of securities to the recipients did not
involve a public offering. The recipients of securities under
compensatory benefit plans and contracts relating to
compensation were our employees or directors and received the
securities as compensation for services. Each of the recipients
of securities in these transactions had adequate access, through
employment, business or other relationships, to information
about us. The sales of these securities were made without
general solicitation or advertising.
Form of Stock Option Award Agreement under the 2006 Equity
Incentive Plan
10
.6A
Form of Change in Control Protection Agreement between the
Registrant and each of Barbara J. Rechterman, Warren J. Adelman,
Michael J. Zimmerman and Christine N. Jones, dated as of
May 11, 2006
.NET Registry Registrar Agreement between VeriSign, Inc. and
Wild West Domains, Inc., dated November 14, 2005
10
.11
Amendment No. 1 to Registry-Registrar Agreement between
VeriSign, Inc. and Go Daddy Software, Inc., dated
November 2, 2004
10
.12
Amendment No. 1 to Registry-Registrar Agreement between
VeriSign, Inc. and Wild West Domains, Inc., dated
November 2, 2004
10
.13
Office Lease for Scottsdale Technology Center
(14455 N. Hayden Road) between Go Daddy Software, Inc.
and IDS Life Insurance Company, dated December 26, 2001 (as
amended)
10
.14
Purchase and Sale Agreement between Go Daddy Software, Inc. and
Sterling Buckeye Network Exchange, LLC, dated August 2005
10
.15
Loan Agreement between U.S. Bank National Association and
Go Daddy Software, Inc., dated October 18, 2005
10
.16
Promissory Note Secured by Deed of Trust (Acquisition Loan)
between U.S. Bank and Go Daddy Software, dated
October 18, 2005
10
.17
Promissory Note Secured By Deed of Trust (Equipment Loan)
between U.S. Bank and Go Daddy Software, dated
October 18, 2005
10
.18
Office Lease between JL Bates, LLC and Go Daddy Software, Inc.
(2299 West Obispo Avenue, Gilbert, Arizona) dated
November 22, 2004 (as amended)
Consent of Ernst & Young LLP, Independent Registered Public
Accounting Firm
23
.2
Consent of Wilson Sonsini Goodrich & Rosati,
Professional Corporation (included in Exhibit 5.1)
24
.1
Power of Attorney (see page II-5 to this registration
statement on Form S-1)
*
To be filed by amendment.
(b) Financial Statement Schedules
All schedules have been omitted because the information required
to be set forth therein is not applicable or is shown in the
financial statements or notes thereto.
Item 17.
Undertakings
The undersigned Registrant hereby undertakes to provide to the
underwriters at the closing specified in the underwriting
agreement certificates in such denominations and registered in
such names as required by the underwriters to permit prompt
delivery to each purchaser.
Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers
and controlling persons of the Registrant pursuant to the
foregoing provisions, or otherwise, the Registrant has been
advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as
expressed in the Act and is, therefore, unenforceable. In the
event that a claim for indemnification against such liabilities
(other than the payment by the Registrant of expenses incurred
or paid by a director, officer or controlling person of the
Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling
person in connection with the securities being registered, the
Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in
the Act and will be governed by the final adjudication of such
issue.
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the
Securities Act of 1933, the information omitted from the form of
prospectus filed as part of this registration statement in
reliance upon
Rule 430A and contained in a form of prospectus filed by
the Registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act shall be deemed to be part of
this registration statement as of the time it was declared
effective.
(2) For the purpose of determining any liability under the
Securities Act of 1933, each post-effective amendment that
contains a form of prospectus shall be deemed to be a new
registration statement relating to the securities offered
therein, and the offering of such securities at that time shall
be deemed to be the initial bona fide offering thereof.
Pursuant to the requirements of the Securities Act of 1933, as
amended, The Go Daddy Group, Inc. has duly caused this
Registration Statement on
Form S-1 to be
signed on its behalf by the undersigned, thereunto duly
authorized, in Scottsdale, Arizona on the 12th day of May 2006.
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose
signature appears below constitutes and appoints Bob Parsons and
Christine N. Jones, and each of them, his true and lawful
attorneys-in-fact and
agents, each with full power of substitution and resubstitution,
for him and in his name, place and stead, in any and all
capacities, to sign any and all amendments (including
post-effective amendments) to this Registration Statement, and
to sign any registration statement for the same offering covered
by this Registration Statement that is to be effective upon
filing pursuant to Rule 462(b) promulgated under the
Securities Act of 1933, as amended, and all post-effective
amendments thereto, and to file the same, with all exhibits
thereto and all documents in connection therewith, with the
Securities and Exchange Commission, granting unto said
attorneys-in-fact and
agents, and each of them, full power and authority to do and
perform each and every act and thing requisite and necessary to
be done in and about the premises, as fully to all intents and
purposes as he might or could do in person, hereby ratifying and
confirming all that such
attorneys-in-fact and
agents or any of them, or his or their substitute or
substitutes, may lawfully do or cause to be done by virtue
hereof.
Pursuant to the requirements of the Securities Act of 1933, as
amended, this Registration Statement on
Form S-1 has been
signed by the following persons in the capacities and on the
dates indicated.
Form of Stock Option Award Agreement under the 2006 Equity
Incentive Plan
10
.6A
Form of Change in Control Protection Agreement between the
Registrant and each of Barbara J. Rechterman, Warren J. Adelman,
Michael J. Zimmerman and Christine N. Jones, dated as of
May 11, 2006
Registrar Accreditation Agreement between the Internet
Corporation for Assigned Names and Numbers and Go Daddy
Software, Inc., dated March 20, 2005
10
.8
Registrar Accreditation Agreement between the Internet
Corporation for Assigned Names and Numbers and Wild West
Domains, Inc., dated February 1, 2002
10
.9
.NET Registry Registrar Agreement between VeriSign, Inc. and Go
Daddy Software, Inc., dated November 14, 2005
10
.10
.NET Registry Registrar Agreement between VeriSign, Inc. and
Wild West Domains, Inc., dated November 14, 2005
10
.11
Amendment No. 1 to Registry-Registrar Agreement between
VeriSign, Inc. and Go Daddy Software, Inc., dated
November 2, 2004
10
.12
Amendment No. 1 to Registry-Registrar Agreement between
VeriSign, Inc. and Wild West Domains, Inc., dated
November 2, 2004
10
.13
Office Lease for Scottsdale Technology Center
(14455 N. Hayden Road) between Go Daddy Software, Inc.
and IDS Life Insurance Company, dated December 26, 2001 (as
amended)
10
.14
Purchase and Sale Agreement between Go Daddy Software, Inc. and
Sterling Buckeye Network Exchange, LLC, dated August 2005
10
.15
Loan Agreement between U.S. Bank National Association and
Go Daddy Software, Inc., dated October 18, 2005
10
.16
Promissory Note Secured by Deed of Trust (Acquisition Loan)
between U.S. Bank and Go Daddy Software, dated
October 18, 2005
10
.17
Promissory Note Secured By Deed of Trust (Equipment Loan)
between U.S. Bank and Go Daddy Software, dated
October 18, 2005
10
.18
Office Lease between JL Bates, LLC and Go Daddy Software, Inc.
(2299 West Obispo Avenue, Gilbert, Arizona) dated
November 22, 2004 (as amended)